Income Statement Insight: Gross Margins Matter
08/09/07 - 05:04 PM EDT
Jonas Elmerraji
Because of the influence gross margins have on a company's bottom line, they also play a part in a company's propensity to declare dividends 
. Naturally, higher gross margins often play into a greater dividend yield for stockholders .
comparable companies is just as important when you look at gross margins as it is with any other measure of fundamental performance. And to really get a grasp on how a company's gross margins stack up against its competitors' numbers, you need to take a look at the industry average -- it's essential.
Let's say you're evaluating the performance of Whole Foods (WFMI Quote - Cramer on WFMI - Stock Picks). Whole Foods' last annual gross margin of almost 35% may not look all that impressive against the S&P 500's (what many consider to be a pretty good standard for comparison) gross margin average in the mid-40% range, but when you take into account that the grocery industry's average gross margin rings in at approximately 25%, then Whole Foods' performance level becomes a little clearer.
And when you compare its gross margin against a couple of competitors like Safeway (SWY Quote - Cramer on SWY - Stock Picks) and Kroger (KR Quote - Cramer on KR - Stock Picks), the performance and profitability picture comes into focus even more. Here's a look at how these three grocers stack up:
| Based on Annual Income Statement Data for Fiscal Year 2006 | ||
| Company | Gross Profit (Revenue - Cost of Revenue) |
Gross Margin (Gross Profit / Revenue x 100) |
| Whole Foods | $1,960* ($5,607 - $3,647) |
34.95% ($1,960 / $5,607 x 100) |
| Safeway | $11, 581 ($40,185 - $28,604) |
28.81% ($11, 581 / $40,185 x 100) |
| Kroger | $15,996 ($66,111 - $50,115) |
24.19% ($15,996 / $66,111 x 100) |
| Source: Google Finance *Numbers in millions of U.S. dollars. |
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