J.C. Penney Co. Inc. logged a $163 million first-quarter loss, but chief executive officer Ron Johnson signaled that the retailer’s transformation is “way ahead of schedule” and setting the store on a more fashionable path.
Even so, the quarter was worse than either Johnson or investors expected and shares of Penney’s fell 12 percent to $29.27 in after-hours trading.
“We are proactively going through a year of transformation, learning every day, but in the big picture, it’s just one year,” Johnson told a crowd of almost 400 analysts and vendors at a presentation in Manhattan. The ceo indicated, however, that he wasn’t satisfied with the red ink. “This is not a throwaway year,” he stressed. “We expect to earn money this year — good money.”
“It was a very tough quarter, but not necessarily unanticipated,” added chief operating officer Michael Kramer.
Johnson said the coupons the company has now disavowed tended to push shoppers into commodity purchases, hurting basics as shoppers don’t have the incentive to restock their sock drawer. However, “the fashion’s actually doing quite well,” the former Apple retail chief said. “That’s encouraging because we’re going to compete on product and presentation.”
Aside from basics, jewelry and home are the two other toughest categories for the chain, Johnson said.
Still, Penney’s new pricing structure isn’t resonating enough and still needs to be clarified. “We’ve got to get our pricing across,” Johnson stated. “We’re not everyday pricing. We run 12 promotions a year,” as well as clearances every first and third Friday of the month, which are being marketed now as “the big deal starts today.”
“We didn’t have enough impact in the store on pricing,” he admitted.
Discussing management changes, Johnson said the executive team has “dramatically changed” with 41 new leaders — 20 involving internal promotions and 21 recruited from outside. The buying organization has been whittled down to 60 teams from 92, and sales commissions have been eliminated. It’s all part of the effort to “simplify” the operations, Johnson stressed.
On the merchandise front, Johnson said the objectives were to increase turns and merchandise flow to keep inventories down, and “chase” merchandise, rather than pile it up high as the store was known for previously.
By the time fall goods hit in August, the department store chain will have switched out 47 percent of its prior assortment. New offerings for fall will include accessories from Betseyville by Betsey Johnson, Lulu Guinness and Vivienne Tam, as well as jeans from Buffalo, young men’s from DC, girls fashions from Dream Pop by Cynthia Rowley, and Royal Velvet furniture, window treatments and tabletop. Next year, styles from Marchesa’s Georgina Chapman as well as William Rast will be added, along with Watchgear by Tourneau.
A Martha Home shop by Martha Stewart will anchor the home department. Also being added to the floor are Happy Chic by Jonathan Adler; a collection of products by Michael Graves, who previously had a collection at Target, a Design by Conran line of furniture, decorative home and lighting by British designer Terence Conran, and a line from Bodum, the Danish kitchen goods producer.
President Michael Francis gave a nod to the branded private-label approach taken by Uniqlo and Joe Fresh and said Penney’s would introduce a JCP brand this year that will cut across categories. He also suggested that at Penney’s, there’s opportunity to add categories. “There’s a variety of categories we’re not in, whether that’s food and beverages or hardlines.”
All told, the reinvention pushed the Plano, Tex.-based chain to a first-quarter net loss that equaled 75 cents a share. That’s down from year-ago earnings of $64 million, or 28 cents. Excluding markdowns taken to get inventories in line with the company’s new strategy as well as restructuring and management transition charges and pension expenses, Penney’s posted losses of 25 cents a share. Analysts, who were prepped for a painful quarter, were only expecting losses of 10 cents a share.
Sales for the quarter ended April 28 fell 20.1 percent to $3.15 billion from $3.94 billion with an 18.9 percent comparable-store sales drop. Wall Street was looking for sales of $3.46 billion.
Penney’s saw the sharpest drop in business was on weekends, when coupon shoppers were most prevalent.
While the retailer did not provide guidance on sales for the year, Kramer did state that “sales will be better in the back half of the year.” Penney’s believes its new pricing strategy will catch on more, and 10 new shops for fall — including vendors already in the store such as Arizona Jeans, Izod, Liz Claiborne, and Levi’s — will help. Kramer also said that while traffic was “the primary issue,” the store’s conversion rate had only dropped to 20.8 percent, from 22 percent a year ago, and that the average ticket out the door only fell to $46 from $48. “It wasn’t that much,” he said. “People are seeing the value.”
Penney’s said it faces additional restructuring charges this year as it simplifies operations. The company no longer expects to meet net earnings guidance of $1.59 a share, but did affirm its adjusted earnings projection of $2.16 a share. The retailer also said it would discontinue its 20-cent quarterly dividend.
While analysts were generally impressed by the presentation, and liked the list of upcoming brands, they said the labels were more like “frosting” and hoped for bigger name brands that could help drive basics. There was also some question as to whether Penney’s has focused enough on the demographics it needs to target.
However, Johnson promised, “Basics are really important to us. We are going to win in basics,” adding that a company like Gold Toe could become featured as a shop.
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