By  on February 24, 2017

Can J.C. Penney Co. further its turnaround?The company turned profitable last year for the first time since 2010, has set plans to close 130 to 140 stores this year to create a more productive fleet, and is planning conservatively. Comparable-store sales for 2017 are expected to range from negative 1 to plus 1 percent, while adjusted earnings per share are seen coming in at 40 cents to 65 cents a share, compared to 8 cents last year.On the agenda this year: 70 more Sephora shops on top of the 577 already inside Penney's stores; 100 additional appliances showrooms on top of the 500 in place; a buildup of activewear by rolling out Nike shops to 500 stores and Adidas to over 400 stores; furthering the rollout of buy online, pick up in store; working to devise smarter coupon and promotion strategies to improve margins; increasing the stockkeeping unit count on, which is reaping double-digit gains; adding swimwear and accessories to plus-size Boutique shops, and testing smaller Sephora and appliance footprints to work in smaller stores.Penney's expects to reverse its negative apparel trends as soon as this spring and see greater improvement in the fall, after reducing the private apparel brand development cycle time and shifting to a greater emphasis on casualwear and less careerwear.Regarding Penney's overall,  "I would say we've turned around the business," Marvin Ellison, the chain's chairman and chief executive, told WWD.Ellison was speaking just after the company reported its big brick-and-mortar streamlining and that for the full year, net earnings came to $1 million, versus a $513 million loss in 2015. Total sales amounted to $12.5 billion compared to $12.6 billion in 2015. Comparable-store sales were flat for the year.In the fourth quarter, net income reached $192 million versus a loss of $131 million in the year-ago period, and net sales at $4 billion were flat compared to a year ago. Comparable-store sales were down 0.7 percent."The goal was to end the year profitable. We did that," Ellison said during an interview. "We hit our $1 billion earnings before interest, taxes, depreciation and amortization target. Net income delivered positive earnings per share. We have almost $2.8 billion in liquidity. We have growth initiatives that will enable us to grow even in face of uncertainties" in the retail landscape.For the usually understated Ellison, it was no time to mince words. "J.C. Penney represents one of the greatest retail turnarounds in retail history. This year was not without its challenges, particularly in our women’s apparel business, but I am proud this team delivered on our goal to return our company to profitability in 2016. This is no small feat when considering the situation a few years ago, but our over 100,000 associates embraced our strategy and came to work each day focused on doing their part to drive this incredible turnaround in profitability.”Asked if 140 stores shuttering are enough to clean up the fleet and could another big round of closings happen a year from now, Ellison replied, "We are in the process of testing a lot of initiatives that we hope will work in smaller-footprint stores and in some of the stores in non A-level malls. If these initiatives play out well, we will have fewer stores to close in the future. I don't think we will ever again be closing this many stores."On the apparel front, Ellison told WWD that last year the company reduced the private brand development cycle time, from conceiving the design to landing the goods on selling floors, by 40 percent. "That's incredibly important and specific to women's and kids'."In addition, Ellison said Penney's is poised for better sell-through by shipping replenishment products from overseas sooner and now having the capacity to hold goods domestically, closer to stores.Merchants are buying fashion products closer to need and formulating a better balance of casual and careerwear. "You will see a much higher percent of contemporary and casual starting with spring goods landing as soon as next week," Ellison said. While there are signs that women's apparel is performing better already this year, all apparel categories — men's, kids' and women's — performed below company comps last quarter. Home, Sephora, salon and fine jewelry were the top-performing categories.During a conference call with investors and analysts, Ellison said Penney's would "pivot" the retail strategy to nonapparel and growing categories. Asked to elaborate, he told WWD: "You are not going to see us doing any major moves to shrink apparel." It's a matter of changing the edit and having apparel represent a smaller percentage of the total business as other categories get added or grow. Toys, for example, were reintroduced last year after a long absence. "We will continue to offer toys in 100 stores in the first half of 2017," he said.Ellison acknowledged Penney's was slow to adjust to the "casualization of America and is one of the last retailers to get into active in a big way. It's all about transitioning to a good balance of career and casual," and recognizing where and when Penney's was over-assorted."We will see improvements in the business in the spring and even more improvement in the fall," Ellison predicted.While Penney's is building up its Nike and Adidas presentations, it doesn't carry Under Armour. "Under Armour is not something we are prepared to talk about now," Ellison said (that activewear brand has done a deal with Penney's rival Kohl's). "If we have an opportunity to bring in another big supplier we will definitely be open to that. Nike is the number-one brand in the world. We are eager to expand the number of doors and categories with Nike. Adidas is performing well. We are really pleased to accelerate [Adidas] to roughly 400 stores."Penney's is also rethinking couponing, taking "a more controlled and data-driven approach" and testing pricing initiatives, with the aim of increasing margins after a decline last year."I think our customers have voted historically that coupons matter to them," Ellison said. Historically, couponing and promoting were based on last year's calendar and results and instincts."We had way too much art and not enough science," Ellison said. "We took coupons to a level that was unhealthy and didn't advertise in a way that would be healthy." Going forward, it will be "just a more strategic, data-driven process."In addition to the store closings, Penney's expects to close a distribution center located in Lakeland, Fla., in early June, and shift those operations to the logistics facility in Atlanta. The company is also selling a supply chain facility in Buena Park, Calif.The store closures represent 13 to 14 percent of the current store portfolio and less than 5 percent of total annual sales, less than 2 percent of EBITDA and 0 percent of net income. Penney’s joins Macy’s, Sears and other chains which have decided to close many stores this year.“During the year, it became evident the stores that could fully execute the company’s growth initiatives of beauty, home refresh and special sizes generated significantly higher sales and a more vibrant in-store shopping environment," Ellison said. "We believe the relevance of our bricks-and-mortar portfolio will be driven by the implementation of these initiatives consistently to a larger [percentage] of our stores. Therefore, our decision to close stores will allow us to raise the overall brand standard of the company and allocate capital more efficiently.” Store closings were also based on performances. They represent a mix of small and larger boxes.Penney's said it will save about $200 million through the closings and in the first half of 2017 post an estimated pre-tax charge of $225 million from primarily lease termination expenses, non-cash asset impairments and transition costs. In mid-March, Penney's will list the stores closing. They are expected to close in the second quarter of 2017.The retailer is offering a voluntary early retirement program for 6,000 associates including home office, stores and supply chain personnel who met certain age and years of service criteria as of Jan. 31. "By coordinating the timing of these two events, we can expect to see a net increase in hiring as the number of full-time associates expected to take advantage of the early retirement incentive will far exceed the number of full-time positions affected by the store closures," Ellison said.

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