This May Be the Worst Quarter in Retail History


In my 15 years of investing I've seen some earnings report doozies in the retail sector. The dot-com collapse and the credit crisis kept investors hiding under their bed sheets long enough to create some pretty hideous year-over-year comparisons. However, the figures that struggling retailer J.C. Penneyreported last night were nothing short of the most atrocious quarter ever to grace the retail sector.

Let's face it: No one expected a miracle. Everyone was just sort of hoping that Penney's would report about a 20% drop in same-store sales and we'd move on with the ongoing turnaround plan. What actually happened was that Halloween came early.

For the quarter, Penney's total revenue plummeted 28.4% to $3.88 billion from the year-ago period as its total loss ballooned more than 600% to $552 million. Internet sales tumbled a horrific 34.4% and same-store sales, which exclude the effects of newly opened and closed stores, dropped a staggering 31.7%, or 560 basis points worse than Wall Street had anticipated. Furthermore, same-store sales figures have gotten progressively worse with each passing quarter:


Q1 2012

Q2 2012

Q3 2012

Q4 2012

Same-Store Sales %





Source: Associated Press.

I've been pondering these figures since Penney's released its report after the bell, and I can't honestly recall any retailer with as serious a regression in same-store sales figures as what Penney's reported last night. The worst comparable performance I could find was teen retailer American Apparel, which saw same-store sales declines of 20% on a constant currency basis during the height of the recession in August 2009. I'll give American Apparel some leeway given the market conditions at the time, but its share price still hasn't rebounded after four years of a slowly improving economy. Could that signal that Penney's fate will be similar?

Penney's CEO Ron Johnson did his best to admit his mistakes, and noted that the company plans to bring back about 100 sales a year in order to drive traffic back into its stores. While I've been a Ron Johnson supporter up until now, I can't help but point out how silly he sounded when backtracking on his comments with analysts in the conference call: "The customer will dictate the timing [of the mini-shop rollout]." It's been quite evident up until now that the customer has had little say in dictating the direction Penney's would head next, so to hear Johnson backpedaling has me concerned that Penney's management is as lost as it's ever been.

One pending catalyst that is hovering on the horizon is the brouhaha between it and Macy's in a New York courtroom over the rights to sell merchandise from Martha Stewart Living Omnimedia . According to Macy's, it established an exclusive pact with Martha Stewart in 2007 that, it claims, extends to 2018 and should preclude Penney's from selling Martha Stewart products in its stores. Penney's, on the other hand, asserts it has the right to sell Martha Stewart's products in its stores and plans to open up Martha Stewart mini-shops within many of its retail locations. Not to mention that Penney's holds a 16.6% stake in Martha Stewart Living Omnimedia. Martha Stewart herself may be unpopular, but her products still drive traffic like nobody's business, so this situation bears watching.

But even if Penney's retains the right to sell Martha Stewart's merchandise, will it matter? Penney's is losing market share to everyone -- and I mean everyone! Kohl's , which has been stuck in quite the rut as it's remodeled many of its stores and revamped its pricing strategy, lowered its fourth-quarter outlook in January, but not before reporting a 3.4% rise in same-store sales in December. I'll give you three guesses as to where I suspect that boost came from, and the first two don't count.

It remains to be seen if Penney's backpedaling can restore the sales it's lost through the return of sale events or if those customers have permanently transferred their shopping elsewhere. What I can say for certain is that Penney's can't absorb another year of nearly $1 billion in cumulative losses. If we're staring down another 25%-plus same-store sales flub next quarter, we may be saying "au revoir" to JCP quicker than anyone had expected.

Is a turnaround in the cards?
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