J.C. Penney Co. Inc., stepping up its turnaround bid dramatically, will close 33 underperforming stores across 20 states.
The shutdowns will result in the loss of 2,000 jobs and a gain of about $65 million in annual savings. Penney’s will be clearing out store inventories with the expectation that all closings will be completed by early May, with the exception of one.
By shedding weak stores, Penney’s said it can focus on its highest potential growth opportunities. Aside from the closings, Penney’s is still trying to restore lost traffic by reinstituting much of what was tossed aside by the previous regime, including certain private labels; an aggressive promotional posture, and recasting some departments such as the home floor to bring back more of Penney’s traditional middle-American appeal and prices. Executives of the Dallas-based chain have also been redoubling efforts to assure vendors and lenders that it’s on the right path to recovery.
The holiday 2013 season is being regarded by some as a tipping point for Penney’s, which reported a 10.1 percent comp-store gain in November, and later cited growth in December, but not yet specifying how much.
“As we continue to progress toward long-term profitable growth, it is necessary to reexamine the financial performance of our store portfolio and adjust our national footprint accordingly,” said Myron E. “Mike” Ullman 3rd, Penney’s chief executive officer, in announcing the closings. “While it’s always difficult to make a business decision that impacts our valued customers and associates, this important step addresses a strategic priority to improve the profitability of our stores and position J.C. Penney for future success.”
Penney’s said it will incur estimated pretax charges of about $26 million in the fourth quarter of fiscal 2013 and approximately $17 million in future periods due to the closings.
Barclays estimated total square footage being closed at 2.55 million and that the stores range in size from 200,000 square feet down to 16,000. Currently, the company has a total of 111 million square feet, Barclays said.
“Our initial thoughts are that the store closures are likely a long-term positive and could generate near-term cash if the company is able to liquidate inventory above cost. However, in the near term, the store closures, combined with associate pay changes [putting them on sales commission], suggest that trends may not be improving quickly and, when combined with the company’s cryptic holiday comp disclosure, may imply that [fourth-quarter] results fell below expectations.”
Barclays also expressed concerns about Penney’s ability to improve gross margins given the recent promotional cadence.
On a brighter note, Penney’s said it’s still proceeding with plans to open a store later this year at the Gateway II development in Brooklyn, N.Y. Last year, Penney’s had more than 1,100 stores operating and 116,000 employees.
Penney’s announcement Wednesday follows last week’s announcement of cost-cutting moves by Macy’s Inc., including five store closures, that are expected to result in the elimination of 2,500 jobs. The belt-tightening comes even as Macy’s reported a solid holiday season, with a 4.3 percent increase in comparable sales for the November-December period. Without licensed departments, the increase was a slightly milder 3.6 percent.
This week, Sears Canada said it entered into an agreement with IBM to outsource work performed at three Sears Customer Contact Centers, resulting in the loss of more than 1,300 Sears support employees. Sears is also streamlining its logistics operations, where 283 employees were cut.
Penney’s last week provided an update on its holiday results that was positive but devoid of specifics. Investors and analysts were disappointed by the dearth of information and sent shares down 10 percent. While department and specialty retailers typically unleash closings after New Year’s and store reviews, it’s usually only a handful, unlike Penney’s round of 33. The magnitude reflects intensified efforts evaluating the real estate portfolio and to get the company back in the black. Penney’s is able to effect so many closings by letting leases expire without renewing or working out different arrangements with landlords. Two of the 33 stores are company-owned.
To help ease concerns about the business and reassure vendors that turnaround progress is being made, Ullman sent out a letter this week thanking them for their support and adding, “We are pleased with the company’s performance and expect to end the year on a positive note.”
He characterized the holiday season as “certainly an interesting one, with a compressed calendar, winter snowstorms and challenging mall traffic. In spite of the significant headwinds facing all retailers, we made it through the holiday shopping season in good shape. With your partnership, J.C. Penney’s combination of relevant and giftable merchandise, focus on customer service and compelling promotions enabled our teams to drive sales between Black Friday and Christmas that exceeded our expectations.”
Ullman said the season’s best-selling categories were outerwear, sweaters, fleece and cold-weather accessories, activewear, young men’s, juniors, housewares, Sephora, boots and athletic shoes. Jcp.com experienced “robust” sales though the season. Gift-card sales were also “particularly strong,” Ullman said in the letter.
He went on to mention some initiatives in the weeks ahead, including:
• Revamping and remerchandising the intimates floor in time for Valentine’s Day, relaunching the Ambrielle private-label intimates line, and bringing back dedicated staffing and bra-fit specialists for better service.
• Exclusive partnerships in golfwear for men and career dressing for women that will be announced soon.
• New brand positioning to launch during the Academy Awards. Penney’s has long been a major sponsor of the event.
• By early March, the revamp of the home floor will be complete with “relevant assortments of national and private brands, a floor layout that is easier to shop and a promotional cadence that draws more traffic in stores and online.
Ullman said fourth-quarters earnings will be released in February. At that time, he will discuss the final months of 2013 in more detail and how the company intends to sustain the turnaround progress in 2014. He said that involves “prudently managing our business, engaging and rewarding our people, and delivering on our promise to the customer every single day.”
“It’s a big move and it’s the right move to make. This will help the bottom line,” said retail analyst Walter Loeb. “They probably have to close more. But you know it’s not just Macy’s and Penney’s. Other retailers are closing stores. The country is overstored.”