J.C. Penney Says It Expects Improved Holiday Sales

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JC PENNEY earns
Mark Lennihan/AP
By Phil Wahba

J.C. Penney said Wednesday that November sales were encouraging and popular house brands were lifting gross profit margin, suggesting the struggling department store operator is turning a corner.

The retailer also stuck to its forecast for more than $2 billion in liquidity at fiscal year-end, soothing persistent investor fears about its financial health following a 25 percent drop in sales in 2012.

"The turnaround at J.C. Penney is beginning to take hold," Chief Executive Officer Myron Ullman said on a call with analysts.

But Ullman also acknowledged Penney still has "a long way to go" and needs to win back more shoppers. Customer visits remain below last year's levels, and the company is still clearing out a lot of unpopular merchandise at deep discounts.

While gross margin is improving, it was sharply lower in the fiscal third quarter, which ended Nov. 2, and the company posted a deeper loss for the period.

But investors appeared to focus on Penney's turnaround comments. Penney (JCP) shares were up 7 percent to $9.32 in afternoon trading. A month ago they were plumbing 32-year lows near $6.

Ullman, who returned to the helm in April, has made strides to recover sales lost after his predecessor, Ron Johnson, %VIRTUAL-article-sponsoredlinks%alienated long-time customers last year by jettisoning discounts and popular house brands such as St. John's Bay and Stafford clothing and JCP Home, and introducing trendier brands that proved unpopular.

Penney slashed prices during the third quarter and held many sales with "doorbuster" deals, a strategy that proved wise as nervous, price-conscious shoppers continue to gravitate toward bargains.

Penney will continue that strategy during the holiday season.

"The environment, as you know, is very aggressively promotional, and we must and will compete to win," Ullman said.

Penney has also given more space in its stores to popular merchandise such as luggage and window treatments.

As previously reported, Penney posted its first monthly comparable sales gain in nearly two years last month, and it said it expects business to continue improving in the fourth quarter, which includes the holiday period.

"It shows they have right momentum now, but ultimately we're looking at the fourth quarter," said Walter Loeb, retail analyst with Loeb Associates.

During the holiday quarter a year ago, comparable sales, which include sales at stores open at least a year and online sales, fell 31.7 percent, making comparisons for the current quarter easier. Gilford Securities has forecast comparable sales could rise as much as 15 percent in the fourth quarter.

House Brands to the Rescue

Penney reported a wider net loss for the third quarter as heavy promotions aimed at winning back shoppers with bargains hurt margins. The deals to clear out merchandise ordered by Johnson were particularly damaging.

"The discounting of merchandise is not the problem -- the old inventory is still the problem," said Rick Snyder, senior retail analyst at Maxim Group.

Gross margin, a measure of profitability of merchandise, fell 3 percentage points to 29.5 percent of sales in the quarter, though Penney said it improved steadily during the period. Margin was well below those at rivals -- 39.9 percent at Macy's Inc.'s (M) and 37.5 percent at Kohl's Corp. (KSS).

But Ullman told analysts that more plentiful inventory of Penney's house brands, including more sizes and styles, would help, noting such merchandise has a gross margin as much as 5 percentage points higher than other goods. He also said Penney was making progress clearing out merchandise ordered by Johnson.

For the fiscal third quarter, Penney reported a net loss of $489 million, or $1.94 a share, compared with a net loss of $123 million, or 56 cents a share, a year earlier. Excluding items such as restructuring expenses, Penney lost $1.81 a share, while analysts were expecting a loss of $1.77 a share.

Total sales fell 5.1 percent to $2.78 billion.

Penney, which earlier this year lined up a $2.25 billion financing package and in September sold nearly $800 million in new shares to further shore up its finances, said it had voluntarily paid down $200 million on its revolving credit facility during the third quarter.

The company's debt at the end of the quarter totaled $5.61 billion.

J.C. Penney Says It Expects Improved Holiday Sales

It was repeated so often that it became dogma: Ron Johnson's greatest sin was ditching the sales and coupons. Johnson himself called it a "mistake," and one of his last acts as CEO was to abandon his pricing strategy and bring back the coupons.

While many commenters cheered the coupon comeback, a few were more skeptical of the return to the old regime. In fact, many noted that the retailer was obviously just jacking up prices just so they could lower them again with discounts.

Obviously J.C. Penney needs to bring back the sales and coupons if it wants to attract its wayward customers, but it should probably find a more subtle way to do it. Johnson was criticized for abruptly abolishing coupons without first testing the strategy; if the new management just slaps on higher price tags and then hands out coupons, it risks making the same error in the opposite direction.

One commenter identified herself as a sales associate for J.C. Penney, and said she hated the "dog and pony show" of the old coupon regime. Her comment got more than 300 'likes,' as well as comments from other sales associates who expressed how difficult it was to deal with price adjustments, extreme couponers and confusing sales.

"As an associate, I had Nightmares in Nov & Dec of 2011 when the coupons were out in Groves [sic]," said another commenter, who went on to suggest that the retailer should place limits on how many coupons shoppers can use.

The lesson for management? If you're going to bring back coupons, don't make a complete return to the "death by coupon" era -- it can be a huge pain for your employees.
In overhauling the retailer's apparel offerings, Johnson evidently wanted to transform its customer base into something more closely resembling Abercrombie's young and skinny crowd. Unfortunately, that meant that J.C. Penney's larger customers were left out in the cold.

Various commenters complained that plus-size offerings have dwindled significantly, and that they'd like to see all styles of clothing available in larger sizes. If the new management (which is mainly the old management) wants to win back customers, it will need to make sure customers of all sizes are accommodated.
Several commenters said that they missed being able to shop and order through a catalog.

Sure, most people who can't make it into the store will be inclined to shop online, which is more cost-effective for retailers than shipping out heavy catalogs and taking orders by phone. But members of J.C. Penney's older customer base may not be as technologically inclined, so it's likely missing out on sales by not providing it as an option.

The retailer has already made concession to its older shoppers by bringing back St. John's Bay and other "basic" clothing. Making it easier for them to shop from home would also be a good move.
One innovation that Johnson brought over from the Apple Store was the mobile checkout: Instead of waiting in line, customers could get checked out by a roving cashier toting a smartphone or tablet.
But much like the pricing strategy, mobile checkouts apparently don't play as well in a big department store as they do in the Apple Store (AAPL). We've heard from J.C. Penney employees complaining about the switch, and it looks like customers aren't thrilled either; a few commenters noted, for instance, that the process makes getting a receipt a hassle.

Maybe the system has been implemented poorly, or maybe it's just a case of an older customer base being confounded by innovation. Either way, this looks to be another change that J.C. Penney should scale back or reconsider.
Ron Johnson had a vision of a department store as a marketplace -- instead of just organizing clothes by department, he would have a collection of boutiques, each dedicated to one brand.

But the stores-within-a-store concept might be confusing some customers. One commenter pointed out that the layout makes comparison shopping difficult, forcing customers to visit multiple boutiques just to find a pair of jeans. Other commenters echoed that complaint, noting that they found the layout so frustrating that they left the store empty-handed.

The retailer has burned through a whole lot of cash remaking its stores, so we imagine management isn't thrilled at the prospect of undoing those changes. But if they want to get sales figures back up, they'll need to arrange their stores in a way that makes comparison shopping among its brands easier.
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