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J.C. Penney Reports Loss

CEO sees 2012 as “year of transformation.”

J.C. Penney Co. Inc. lost money and market share in 2011 yet says it’s already seeing some uptick with its sweeping reinvention strategy.

This story first appeared in the February 27, 2012 issue of WWD.  Subscribe Today.

Weak sales, and costs associated with the transformation — from restructurings to management changes and the new pricing and promotional format — contributed to Penney’s net loss of $87 million, or 41 cents a share, for the fourth quarter ended Jan. 28, compared with a $271 million net profit a year ago. For the year, Penney’s lost $152 million compared with a profit of $389 million for 2010.

Comparable-store sales fell 1.8 percent last quarter to $5.4 billion, against $5.7 billion in sales during the 2010 fourth quarter. Sales for 2011 totaled $17.3 billion, versus $17.8 billion in 2010.

Gross margin decreased $506 million, or 740 basis points, to 30.2 percent of sales in the latest quarter due to lower-than-expected sales that resulted in higher markdown activity. Penney’s said the fourth-quarter results were consistent with its most recent guidance.

“While 2011 was a year of transition at J.C. Penney, 2012 will be a year of transformation,” said Ron Johnson, Penney’s chief executive officer. The company expects fiscal 2012 earnings to meet or exceed $1.59 a share, including restructuring charges and pension expenses. Adjusted earnings are seen meeting or exceeding $2.16 a share on a non-GAAP basis.

Penney’s on Feb. 1 introduced a “fair and square” pricing strategy encompassing everyday low pricing, month-long values and clearance Fridays every other week, and eliminating the incessant doorbuster and blockbuster price-cutting approach. The retailer also laid out plans for a reimagined store environment with 100 shops for brands and private labels to be built in the next three and a half years, fewer brands overall and a “town square” for services and activities. “It’s all designed to create an experience that allows customers to shop on their terms, in the rhythm of their lives and not ours,” Johnson said on a conference call Friday.

He went on to say that it’s too early to reach conclusions on the new pricing strategy, since the retailer is only three weeks into a 52-week transition, though there are some early learnings. “February sales are trending below last year, especially because the chain is up against major promotional marketing from a year ago, such as extra discounts and coupon events. But we are learning that customers have responded well to our fashion apparel pricing highlighted in the monthly book. Whether they’re offered as an everyday price or a month-long value in the book, fashion apparel and accessories are performing as hoped. This has been true in men’s, women’s, children’s, shoes and accessories.”

However, home and fine jewelry are struggling, partly because there were fewer catalogues sent out. Johnson said the company is working to strengthen signs and make other adjustments to better communicate the values and that fine jewelry will be advertised more in April.

Johnson was bullish about Penney’s shop-in-shop strategy, which currently just consists of Sephora and MNG by Mango but will grow to 100 shops over time. “Sephora continued to outperform the rest of the store, growing strong double-digit comparable-store sales increases, and MNG by Mango has significantly improved over the last year.” These results “validate the shops strategy and provide early evidence we’re bringing [in] a new customer with our all-new marketing and updated personality.”

Johnson said customers are giving high marks to the attention they’re receiving and the availability of assistance, and that they “love” some preliminary changes on the selling floors made recently. Inventories and signs were reduced so there’s less clutter, and aisles were widened, all to better showcase merchandise.

Customers, Johnson said, find the new pricing model “easy to understand….Ultimately, we know our success is tied to simplicity. Our new corporate strategy requires that we dramatically simplify our operations and realign our organization so that associates are in the right position to do their best work and deliver on our vision.”

According to Michael P. Dastugue, chief financial officer and executive vice president, the fourth quarter was “challenging from a sales and margin standpoint” though “the overarching theme was the preparation and completion of the groundwork necessary to begin the execution of our new transformational strategy.”

While there will still be charges associated with the strategy, “By simplifying our processes across the entire organization, we will optimize our expense structure, flow more margin through to the bottom line, and ultimately enhance J.C. Penney’s profit formula for the long term,” added Michael W. Kramer, chief operating officer.

Kramer explained that store leaders are eliminating work and processes that were required under the old Penney’s business model but not needed under the new one. Kramer also said cash wraps are no longer overstaffed. “This saves salary dollars, but more importantly, enables our store associates to spend more time on actions that add value, like serving the customer. Customers are already noticing the change.”

Personnel cuts are expected at Penney’s, though executives did not specifically address that. Kramer said teams are being reorganized to the new simplified business model and Penney’s sees a stronger performance in the second half of 2012 than the first half. “Not only does executing change like this take time, but we also have to acknowledge the tougher [comparisons] in the first half, especially in Q1….We will be transforming J.C. Penney month by month, quarter by quarter,” he said.