J.C.Penney Co. has reset its women’s apparel business but not without some short-term consequence to the bottom line.
“We took the bold but necessary steps to liquidate apparel inventory in an effort to accelerate a wider transformation of our women’s department. These steps allowed us to clear out slow-moving inventory this quarter and reset our entire women’s department,” Marvin Ellison, Penney’s chairman and chief executive officer, said Friday, after the company reported a deeper loss for the third quarter, though comp sales were positive. Higher cost of goods involved in the women’s changes, as well as restructuring charges related to store closings, were key factors.
As reported by WWD last June, Penney’s has been working to expand women’s casual and contemporary offerings, denim, business casual and activewear while downplaying traditional apparel. Among the specific steps taken, Adidas and Nike assortments are in more Penney doors. The exclusive Libby Edelman “lifestyle” fashion collection by Libby Edelman, cocreator of Sam & Libby and Sam Edelman footwear, rolled out in September. Penney’s Liz Claiborne brand was redesigned to emphasize contemporary and weekend styles, and the Tracee Ellis Ross for J.C. Penney limited-time capsule collection of women’s apparel, accessories and home decor, launches Sunday. In addition, Penney’s is providing what Ellison described as “fast, frequent fashion” across some private brands like A.N.A. and Belle & Sky, with weekly and monthly infusions of fashion.
Women’s apparel represents about a quarter of J.C. Penney’s annual revenues; women’s accessories, jewelry and Sephora, about 19 percent; men’s apparel and accessories, about 22 percent.
“We know we have work to do, but we are making good progress in women’s,” Ellison said during his conference call with investors on Friday.
“Following the reset, we saw improved performance in our women’s division, confirming these actions were necessary to drive growth in this high-volume apparel division. In fact, women’s apparel delivered a positive comp for the month of October, even when you remove the benefits of the accelerated clearance sales,” to reset the women’s areas.
Ellison said it’s too soon to declare victory in women’s, though the category did generate its first positive comp in 14 months. “While these liquidation steps had a short-term negative impact on profitability in the third quarter, we firmly believe it was the right decision for the company as we transition into the fourth quarter and fiscal 2018.”
Ellison’s point is that the $13 billion company is committed to making tough decisions that could hurt the bottom line temporarily but benefit the retailer long-term. That was evident in the company’s report on the third quarter ended Oct. 29, when there was a net loss of $128 million amid store closings, higher cost of goods and clearing out deficient merchandise. The decline was steeper than the net loss of $67 million in the third quarter of 2016.
Total sales last quarter decreased 1.8 percent to $2.8 billion, from $2.86 billion in the year-ago period, primarily as a result of the 139 store closings this year through the end of the third quarter.
Overall, however, comparable sales gained 1.7 percent last quarter. Home, Sephora, footwear, handbags, women’s special sizes and salon were the top-performing divisions. Currently, there are Sephora shops inside 642 Penney’s stores, representing 75 percent of the chain. Ellison singled out Fenty Beauty by Rihanna as a bestseller.
Cost of goods sold, which excludes depreciation and amortization, was $1.85 billion, or 66 percent of sales, compared to $1.8 billion, or 62.8 percent of sales in the same period last year. Penney’s said the increase was primarily driven by the liquidation of slow-moving inventory, higher shrink rates and the continued growth in the online and major appliance businesses.
Last week, Penney’s disclosed it restructured its merchandising and product development and design teams, which saw the departure of chief merchant and Penney’s veteran John Tighe. Ellison said the goal was to “flatten the organization, streamline decision-making and increase our agility in this rapidly changing retail environment.”
“These decisions are never easy, and I have the utmost confidence in our merchant leaders, who will continue to drive efficiency across their respective merchandising divisions and will be empowered to make buying decisions based on their instincts and real-time customer data.”
On the non-apparel side, Penney’s is building up Samsung and LG television offerings, has rolled out toys to all of its stores and ship from store capability, as well as having significantly increased online stockkeeping units and improved the functionality of Penney’s app.
There is also a new “overarching centralized pricing strategy.” As Ellison explained it, the company still considers “the instincts and expertise of the merchants and the buyers” in pricing decisions. However, “We took every single SKU in the company and we put it in a specific category, things like what is the traffic driver, what is an impulse item, what’s the pricing strategy for an impulse item, what’s a core item and the category that the SKU goes in dictates the pricing analysis in where it should fall. That’s a million miles from where we’ve been as a company, and actually the team has embraced it, because it takes a lot of pressure off the merchants and it gives them time back to do what they should do and that is pick great product and design product that excites our customers.
“Our merchandising structure was virtually the same structure that we had 20 years ago. And our former chief merchant, John Tighe, was a good merchant and more importantly a good person, but the structure was wrong. And I learned a long time ago that good leadership can’t overcome bad structure. And so we’re competing against e-commerce companies that don’t have chief merchants.They don’t even have category merchants. They’re just moving fast with data. We think that merchandising is important, but I believe that leadership should be closer to decision-making and we should have more nimble, agile decision-making based on merchant instincts and data without having this hierarchy that slowed things down.
‘And relative to other areas. I mean, we’re going to continue to challenge ourselves to be a modern company.”