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Macy’s Trimming Costs; J.C. Penney Stock Sinks

Macy’s is planning cost cuts, including store closures, after an increase in holiday comps, while Penney's offered few specifics on the season.

Even this holiday season’s winners are girding for fierce competition in the new year.

This story first appeared in the January 9, 2014 issue of WWD.  Subscribe Today.

Macy’s Inc. on Wednesday implemented a series of cost-cutting moves, including five store closures, that are expected to result in the elimination of 2,500 jobs. The belt-tightening comes even as the company 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.

J.C. Penney Co. Inc., on the other hand, provided an update on its holiday results that conspicuously lacked specifics. Investors and analysts took no news as a sign of bad news and sent shares down 10 percent, to $7.37, in New York Stock Exchange trading.

RELATED STORY: Who Bucked the Downtrend of Lackluster Holiday Season? >>

How retailers exit the holiday season often sets the tone for how they approach the new year, how they allocate funds and how aggressively they plan to purse market share gains.

Macy’s said it expects to eliminate approximately $100 million in annual expenses, beginning in the next fiscal year, through a series of moves including:

• The consolidation of its Midwest and North regions into a new North Central region, cutting its region count by one to seven;

• A reduction in its district count to 60 from 69;

• A realignment of positions within Macy’s stores, and

• A reduction in certain positions in its central office in Cincinnati, as well as various administrative and back-office expenses throughout the country.

The retailer will also eliminate the district planning role for soft home goods within its merchandise planning organization and shift it to the national and regional levels.

Macy’s said that the job cuts aren’t expected to reduce its head count from its current level of approximately 175,000 employees as it takes on associates in areas including online operations and fulfillment centers.

“We began five years ago with a set of business strategies that were largely untested by a national retailer of our size and scope,” said Terry J. Lundgren, chairman, president and chief executive officer of Macy’s. “As the success of these strategies has unfolded, we have identified some specific areas where we can improve our efficiency without compromising our effectiveness in serving the evolving needs of our customers.”

Macy’s will close stores in Mesa, Ariz.; Overland Park, Kan.; Florissant, Mo.; Irondequoit, N.Y., and Murray, Utah, in early spring. The company is going ahead with plans to open five Macy’s stores and three Bloomingdale’s units. A new Bloomingdale’s store at the Stanford Shopping Center in Palo Alto, Calif., will replace an older unit in the same mall. When all is said and done, the company will operate 844 doors.

The stores being closed total 730,000 square feet and employ 412 associates. The new units will occupy 1.25 million square feet. The seven nonreplacement units will employ about 1,460 people.

Macy’s moves will result in closing and impairment charges of between $120 million and $135 million, between $50 million and $55 million of which will be noncash. All will be included in fourth-quarter results.

The company reaffirmed its guidance for full-year earnings of $3.80 to $3.90 a diluted share, exclusive of charges associated with the cost-cutting program. Fourth-quarter comps are expected to increase 2.3 to 2.5 percent.

Initiating guidance for the 2014 fiscal year, Macy’s expects earnings per share of between $4.40 and $4.50 with comparable sales up 2.5 to 3 percent. The EPS projection is better than the $4.32 expected, on average, by analysts prior to disclosure of the cost-cutting program.

Investors sent Macy’s shares up 5.2 percent, to $54.52, in early after-hours trading following the news. They’d closed down 0.7 percent, at $51.84, during the regular trading session.

Prior to the Macy’s disclosures, Penney’s failure to offer material information about December results left analysts feeling skeptical about the midtier department store’s turnaround prospects.

In a 64-word statement, the company said it was “pleased” with its performance during the holiday season and noted “continued progress in its turnaround efforts.”

Penney’s said that “customers responded well to the company’s offerings this holiday season, both in store and online.” The retailer also reaffirmed its fourth-quarter guidance for sequential and year-over-year improvement in comparable-store sales and gross margin.

The data-free update stood in contrast with its two prior reports — one on Nov. 7 reporting 0.9 percent growth in October comps and the more recent on Dec. 3, when it said comps were up 10.1 percent in November.

Analysts took the absence of hard numbers as a sign of a hard holiday season.

Wells Fargo analyst Paul Lejuez said Penney’s benefited from the compressed holiday calendar in November. “We expected a big slowdown in December,” he wrote in a note to clients. “Seems like we got it.”

His current estimate is that Penney’s comps were flat last month, versus previous assumptions of a low- to midsingle-digit increase. Additionally, the analyst projected the company would post losses of $6.04 a share for the fiscal year about to end, down from the $5.78 previously anticipated.

Lejuez also questioned whether Penney’s can halt its high rate of cash burn even if it’s able to return to historical levels of performance experienced before Ron Johnson’s problematic tenure as ceo.

If the fourth quarter “falls short of expectations,” the analyst said, “JCP may again need to access capital markets in 2014.”

Robert W. Baird & Co. analyst Mark Altschwager said that, based on current assumptions, Penney’s “could survive another tough year without further diluting equity holders. However, meaningful improvement is needed by 2015 to stop the hemorrhaging of cash.”