Penney's Back-to-the-Future Strategy Pays Off as Sales Rise

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Earns JC Penney
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By Siddharth Cavale

J.C. Penney's return to "old school" retailing paid off for the second consecutive quarter, sending the company's shares up more than 25 percent in after-hours trading.

J.C. Penney (JCP), whose attempt to go up-market resulted in a 25 percent drop in sales in 2012, has revamped its household goods section and brought back many of the no-frills clothes that were ditched in its failed drive to attract more affluent shoppers.

Comparable store sales rose 6.2 percent in the first quarter ended May 3, helped by demand for household goods, men's and women's clothing, and jewelry, the company reported Thursday.

It was the second consecutive quarter of same-store sales growth, after nine straight quarters of decline.

"We expect to carry this momentum into the second quarter...", said interim Chief Executive Officer Mike Ullman, who returned to the helm last April after the ousting of Ron Johnson, the former Apple (AAPL) retail head who had led the retailer's failed re-imaging strategy.

Gross margins also continued to improve, to 33.1 percent from 30.8 percent in the same quarter of 2013, and Ullman said significant improvement was expected for the rest of the year.

"The return to old-school department store retailing principles ... with an infusion of flare in key departments is a recipe that could bring the company to the land of profits for the upcoming holiday season," Brian Sozzi, chief executive of Belus Capital Advisors, said in a research note.

The company's net loss of $352 million, or $1.15 a share, compared with a loss of $348 million, or $1.58 a share, a year earlier. Excluding items, the loss was $1.14 a share, according to calculations by Thomson Reuters I/B/E/S.

%VIRTUAL-article-sponsoredlinks%Analysts on average had expected a loss of $1.24 a share.

Total sales rose to $2.80 billion from $2.64 billion, beating the average estimate of $2.71 billion.

J.C. Penney maintained its full-year forecast of "mid-single-digits" percentage growth in comparable store sales.

Sales in the company's online business, which is also being revamped, increased 25.7 percent. No dollar figure was given.

Online sales peaked at $1.52 billion in 2011 and then fell by a third in 2012, largely due to a lack of investment.

Selling, general and administrative expenses fell by $69 million to $1.01 billion, exceeding the company's expectations.

J.C. Penney said it had increased its credit facility to $2.35 billion from $1.85 billion, and extended the maturity -- a sign, Sozzi said, that lenders believe its turnaround is sustainable.

J.C. Penney's shares were trading at $10.03 after-hours. About 30 percent of the retailer's volatile stock is held by short-sellers betting that the shares will fall.

Earlier Thursday, Walmart Stores (WMT) reported that its U.S. same-store sales were "relatively flat" in the quarter, blaming severe winter weather.

Penney's Back-to-the-Future Strategy Pays Off as Sales Rise

A big, bold "SALE" sign helps get people in the store, where they are likely to buy non-sale items.

Once you enter, there's the shopping cart. This invention was designed in the late 1930s to help customers make larger purchases more easily.

 

In supermarkets, high margin departments like floral and fresh baked goods are placed near the front door, so you encounter them when your cart is empty and your spirits are high.    
Flowers and baked goods also sit near the front of stores because their appealing smell activates your salivary glands, making you more likely to purchase on impulse.

Supermarkets like to hide dairy products and other essentials on the back wall, forcing you to go through the whole store to reach them.

 

    

Once customers start walking through a store's maze of aisles, they are conditioned to walk up and down each one without deviating.

Most stores move customers from right to left. This, combined with the fact that America drives on the right, makes people more likely to purchase items on the right-hand side of the aisle.

Anything a store really wants customers to buy is placed at eye level. Particularly favored items are highlighted at the ends of aisles.
 

There's also kid eye level. This is where stores place toys, games, sugary cereal, candy, and other items a kid will see and beg his parents to buy.
Sample stations and other displays slow you down while exposing you to new products.
Stores also want items to be in easy reach. Research shows that touching items increases the chance of a purchase.

Color affects shoppers, too. People are drawn into stores by warm hues like reds, oranges, and yellows, but once inside cool colors like blues and greens encourage them to spend more.

Hear that music? Studies show that slow music makes people shop leisurely and spend more. Loud music hurries them through the store and doesn't affect sales. Classical music encourages more expensive purchases.
Store size matters, too. In crowded places, people spend less time shopping, make fewer purchases (planned and impulsive), and feel less comfortable
.
Stores not only entice you with sales, they also use limited-time offers to increase your sense of urgency in making a purchase.
The most profitable area of the store is the checkout line. Stores bank on customers succumbing to the candy and magazine racks while they wait.
Finally, there is the ubiquitous "valued shopper" card. This card gives you an occasional deal in exchange for your customer loyalty and valuable personal data.
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