Signs of Progress Seen in J.C. Penney’s Turnaround

The retailer is gearing up for the all-important holiday selling season and expects December 2013 to be more in line with that in 2011.

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Let’s see what December brings.

This story first appeared in the October 9, 2013 issue of WWD.  Subscribe Today.

With sales trends improving, J.C. Penney Co. Inc. is gearing up for the all-important holiday selling season and expects December 2013 to be more in line with that in 2011.

Myron “Mike” Ullman 3rd, the company’s chief executive officer, said in a telephone interview that every year for holiday “there are promotions because that is the way customers expect to shop for family and friends. We are well positioned to compete.”

The ceo said holiday this year will be “more in line with 2011 than 2012.” He also said “customers are responding to coupons and promotional offers, door busters and, [when] online, to digital coupons.”

Ullman described his team’s approach to holiday as “aggressive.”

“We will definitely be a force to be reckoned with. We will not let anyone take our business away,” he said.

Ullman was mum about whether Penney’s would be open on Thanksgiving Day and, if so, at what time, and would only say that there are certain plans in place that he wasn’t making public just yet.

December 2011 comps were up 0.3 percent, compared with a comps gain of 3.7 percent in December 2010. The company did not report comp-store sales for December 2012, although sales for the fourth quarter ended Feb. 2, 2013, fell 28.4 percent to $3.88 billion, which included $163 million of sales due to a 53rd week in the retail calendar compared with a year ago.

While a 0.3 percent comps gain in December would be a disappointment to some retailers, in the case of Penney’s the gain would show signs of improvement.

And Ullman said many other pieces of the turnaround puzzle are in place.

“We also invested incremental inventory dollars for basics, key items and sizes. [We had them] for the back-to-school period. We are feeling good that the retail detail is in place. Now we are bringing it all together,” he said.

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Ullman was forthright about one key point: “We have to execute in the fourth quarter well.”

Perhaps to allay fears and speculation that new initiatives aren’t working, Penney’s on Tuesday provided an update on its business that indicated improving sales trends.

Positives highlighted by the company include inventory in key brands at appropriate levels and a reconnection with its core customer, especially during promotional events.

According to Ullman, the company’s inventory levels are where they should be for private labels Ambrielle and St. John’s Bay, key destination points for female customers.

The company said sales at jcp.com were up 25.3 percent in September and 10.8 percent in August. That’s compared with a year ago when sales online weren’t significant as the previous management team largely ignored that channel to focus their efforts at the store level.

Ullman said although there are improving trends and more predictable performance, the company is still in the early stages of the turnaround.

Some of the retailer’s issues surfaced in late July over fears that Penney’s might have credit issues, which would impact whether lenders such as factors would approve orders for their vendor clients. August comps were down about 9.8 percent. Sequentially, September’s comparable-store sales were up 580 basis points over August, but comps were down 4 percent from a year ago.

Ullman noted that “margins were impaired by getting rid of merchandise from the second and third quarters from the previous strategy.”

There were liquidity concerns again last month when Penney’s said it would offer 96 million shares in a secondary offering to raise cash to add to its coffers. Analysts thought that Penney’s projections of just $1.3 billion in liquidity by yearend, down $200 million from a projected $1.5 billion in August, meant a higher cash burn rate.

Penney’s said Tuesday that the company has liquidity of more than $2 billion following the $785 million in net proceeds from its secondary offering and $1.3 billion in existing liquidity.

According to Ullman, the $200 million difference was really due to earlier b-t-s projection assumptions that didn’t pan out once the company saw its traffic purchase conversion rate. “The board’s view is that we have sufficient liquidity not just for January 2014, but for the duration of the turnaround. Rather than be clever about [the $200 million difference], we wanted to say this is what we found, the $1.5 billion was a projection, not an actual figure.”

The company also said that it is current in payments to vendors.

Ullman said given the mix of private and national brands, only about 5 percent of Penney’s vendor base is factored, and that’s likely more so among the vendors in the home products category.

By business, the top categories noted by the company were women’s and men’s apparel, fine jewelry and women’s accessories. Ullman cited women’s apparel as the best performer for the moment. The Joe Fresh concept is doing better in women’s than kids, and its Modern Bride collection has “tripled our fine jewelry business,” Ullman said.

The ceo also gave credit to suppliers for their support, as well as sales associates, who have upped the ante in customer service to a level “where it’s the highest it’s ever been in the history of the company.…They want to prove to everyone J.C. Penney is not only viable, it is vibrant. It takes awhile to finish the turnaround. There is no way to speed it up. You just have to do the work.”

Shares of Penney’s rose 0.8 percent to $7.77 in Big Board trading, rising as high as $8.25 in intraday trading.

A number of Wall Street analysts weren’t pleased with the update and what it might mean for the timing of the turnaround.

Deborah Weinswig at Citigroup reiterated her “sell” rating, noting, “We have not yet seen the promotional cadence that we had expected.” Sterne Agee analyst Charles Grom downgraded Penney’s to “neutral” from “buy,” citing both the challenging apparel and retail backdrop and slower progress at the store level than hoped. Paul Lejuez, the senior analyst at Wells Fargo, revised his fiscal-year 2013 estimate down to a wider loss of $6.46 a share from the prior estimate of a loss of $5.81. He said, “Looking at the metrics that were disclosed, it seems J.C. Penney is ‘giving away’ (or sharply discounting) product, and we remain concerned that the comp has come at the expense of gross margin given the deep promos in the store and the weak underlying traffic trend.”


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