WWD.com/business-news/financial/jc-penney-narrows-q3-loss-6478939/
government-trade
government-trade

Growing Pains Continue at J.C. Penney

The turnaround still has a way to go as same-store sales in the quarter fall 26.1 percent.

J.C. Penney

J.C. Penney Co. Inc. is fine-tuning its communications skills as it transforms into JCP.

This story first appeared in the November 12, 2012 issue of WWD.  Subscribe Today.

Completion of its conversion to “specialty store” won’t be until 2015, when it plans to have 100 shop-in-shops. But near-term the company will need to focus on the “promotional department store” to grab back lost foot traffic as it works through its growing pains to migrate the J.C. Penney customer into a JCP shopper.

That doesn’t mean going back to the couponing model, although it will include a promotion here and there. Instead, the company is revamping how it showcases to the consumer its fair-and-square pricing strategy by making it easier for them to do comparisons when they shop.

That adjustment in marketing focus was an admission from chief executive officer Ron Johnson on Friday during a conference call to Wall Street analysts following third-quarter results that the company has lost “half a billion [dollars] in sales for not having some comparison value for customers walking through the store.”

For the three months ended Oct. 27, the loss narrowed to $123 million, or 56 cents a diluted share, from a loss of $143 million, or 67 cents last year. Sales dropped 26.6 percent to $2.93 billion from $4 billion last year. Same-store sales fell 26.1 percent. Even Internet sales were down, declining 37.3 percent to $214 million.

RELATED CONTENT: Click Here for More Earnings Coverage >>

The company said gross margin was 32.5 percent of sales, versus 37.4 percent a year ago. Gross margin, on the decline for several quarters, was impacted by lower-than-expected sales in the quarter and a higher level of clearance merchandise sales.

Shares of Penney’s stock fell 4.8 percent to close at $20.64 in trading Friday on the New York Stock Exchange.

Johnson said, “This was another quarter of unbelievable learning for us at J.C. Penney. We’re now nine months into our transformation and we have eight weeks to go until we’re completely done anniversarying our promotional model. And each quarter, we learned a lot, we adapt, we try to move forward.”

Johnson said customers understand everyday and clearance pricing, but eliminating the monthlong value component of the original three-prong strategy was a key factor in comps falling as low as they did during the quarter.

“And so, we’ve got to figure out how do we replace that volume. But the real lesson to me was that the customer, not just outside of the store, needs to understand the value. When they walk through the store, they want to understand the value of what they buy,” he told analysts.

To that end, the company — at the suggestion of some of its vendors — is showing both suggested prices and the retail price, which is the retailer’s fair-and-square model, on some products. That shift was part of the Izod shop-in-shop launch this year. The retailer will continue with the suggested price format with its national brands going forward.

In addition, when branded vendors have their national sale events twice a year at other retailers, J.C. Penney will honor those temporary reductions so it can remain competitive on pricing, Johnson said.

J.C. Penney will hold its only “sale” of the year on Black Friday, a move Johnson called an “American tradition.” It will also disclose today a holiday promotion called “Merry Christmas, America” that will run from Black Friday through Christmas Eve.

It’s a move that’s also designed to curtail the declines in foot traffic. Penney’s continues to suffer from a decline in traffic, which fell 12 percent in the quarter. This followed a 12 percent drop-off in the second quarter and an 11 percent decline in the first quarter.

As for the eight shop-in-shops launched in August and September, Johnson said “in total, we had 32 percent growth.” Six were “winners.” He said Shop one went from $69 to $207 a square foot, with Shop two at $93 rising to $160. He declined to discuss specifics, such as identifying the shops since the vendor partners didn’t want that information shared. Two shops showed decreases, one of which was JCP men’s, its new private label line. According to Johnson, that was attributable to being too fashionable — the shop showed bright oranges and purples, even though men typically buy basic colors such as navy and gray.

The ceo said the retailer will have seven new apparel shops next year, taking that category up to 17.

Some retail experts remain supportive of Johnson’s efforts, even though the cash balance fell to $525 million from $1.1 billion a year ago and total assets are now $10.8 billion from $12.8 billion. They expect positive trends in the back half of 2013 after the retailer has had a chance to push its shop-in-shops to 40 percent of square footage by the back-to-school season next year, compared with just 11 percent this year.

Marie Driscoll, retail consultant and former equity analyst at Standard & Poor’s, said, “Johnson is doing all the right things. This is retail. It takes time for [the changes] to play out.”

According to Driscoll, “J.C. Penney is not a story for this year. You’ll see some traction months from now. There’s Joe Fresh coming in March with 40 new shops. The metrics for the shops-in-shop are pretty impressive. The problem is they still have to keep their old J.C. Penney customer happy.”

She explained that the key will be in mid-2013 when the retailer anniversaries year-over-year comps and will need to show at that time some sort of growth.

“Investors will be patient. They don’t have to buy the stock today. This is a stock you want to own next Christmas. I think the plan will work….For this year, it will be a tough Christmas,” she said.

Matthew R. Boss, analyst at J.P. Morgan, said, “Ceo Johnson’s strategic flexibility — willingness to adapt — to stabilize the ship is encouraging.” Given the magnitude of the changes under way, a realistic approach is expecting Johnson and J.C. Penney to deliver positive results in the second half of 2013, he said.

Boss said that the “two silver-lining items” are that inventory remains in check despite the sales shortfall as the company is focused on exiting fiscal year 2012 clean, and Penney’s balance sheet remains intact with third quarter cash of $525 million and an anticipated $1 billion of cash on hand by yearend.

Deborah Weinswig, retail analyst at Citi Research, said, “We believe investors will be disappointed with the third-quarter comp decline. However, the [earnings report] does not indicate that the transformation is off-track as the new store model, centered on the shop concept, is surpassing management expectations.”