The numbers were as bad as feared.
J.C. Penney Co. Inc. fell deep into the red in the fourth quarter and full year, with losses of $552 million and $985 million, respectively, on comparable-store sales that dropped more than 30 percent in the quarter. The numbers came out after the stock market closed, but Wall Street still took its revenge, sending Penney’s shares down in after-hours trading by 15.1 percent to $17.96.
In a conference call with analysts, chief executive officer Ron Johnson issued a mea culpa on some issues and outlined shifts in his strategy for the retailer’s ongoing turnaround.
“As much as we accomplished last year, we also made some big mistakes,” he said. “I take personal responsibility for these. Experience is making mistakes and learning from them. I have learned a lot….We worked really hard and tried many things to help the customer understand that she could shop anytime on her terms. But we learned she prefers a sale. At times she loves the coupon. And always she needs a reference price.”
The ceo admitted: “We have brought back sales. We have brought back coupons for our rewards members. Although we still call them gifts. And we will offer sales each and every week as we move forward. But we will do it differently than we did in the past. We don’t need to artificially market prices to create the illusion of savings. We can offer the industry’s best everyday prices and deliver even more exciting value through our promotions.”
He also reminded analysts what he has said previously: “I told you this would be a multiyear effort and it will be. I told you transformations are unpredictable and can be bumpy and this one has been. But our resolve has never been higher and we greatly look forward to year two of our transformation.”
Although Johnson, who began in November 2011, had warned about growing pains during the turnaround, he also had predicted that the company would turn a profit in the first year of its grand plan for transforming the retail model. His new strategy for Penney’s was implemented on Feb. 1, 2012. Now his plan, disclosed during the conference call, is to “promote each and every week.”
Johnson and Kenneth Hannah, the firm’s chief financial officer, who was also on the call, both declined to provide sales guidance for 2013. In addition, the company will manage its inventory as if it were a specialty store, running on a goal of 13 weeks of supply. The retailer is also looking at ways to build loyalty and volume through its store credit card, which it also thinks might be helpful with mobile point-of-sales.
During the question-and-answer period, an analyst asked whether the company needed to think about additional sources of liquidity. The company ended the year with $930 million in cash.
Johnson said, “I think the customer is ultimately going to decide that for us. When we look at traffic and some of the things we are doing to drive those customers back into the store, our intent is to fund this transformation out of our cash from operations. We are committed to the strategy.”
The ceo stressed the firm’s accomplishments during the year as well, such as launching a new vision for the retailer, building a nearly 60,000-square-foot prototype in Dallas and building an entirely new senior team.
He also noted the first shops-in-shop for Levi’s, Izod and Liz Claiborne. The changes, including a simplified business model and organizational structure, new signage and reduction in inventory, involved a “massive change in our cost structure. This year alone, we actualized savings of $800 million, and we are well on our way to achieve the $900 million run rate and savings we identified a year ago,” the ceo said.
Johnson said the company has rolled out mobile to its stores and “within one month every employee on the floor of a J.C. Penney store will carry an iPod Touch and be able to check out customers anytime anywhere in the store. Last week, 25 percent of all transactions were conducted on a mobile device.”
He also said the retailer had bloated inventory levels and, despite a significant sales drop, reduced inventory levels throughout the year by nearly $600 million. It began the year “clean and ready to chase the items selling.”
He spoke of the retailer’s home department, a category in which “we are going to get the business back.” He noted the new home department planned for May, including partners such as Michael Graves, Jonathan Adler and Martha Stewart, but didn’t mention the trial ongoing in New York Supreme Court involving the agreement between Penney’s and Martha Stewart Living Omnimedia Inc. and whether that violated Martha Stewart’s existing contract with Macy’s Inc. Johnson is expected to testify on Friday.
He did address later in the call that he was distressed about rumors each week concerning layoffs and massive head count reductions. “This is much more rumor than it is fact,” Johnson said, also emphasizing that the company has promoted “nearly 400 employees at our Plano headquarters and in our regional centers.”
After discussing new shops that are forthcoming, such as Joe Fresh, and the Italian lingerie brand Cosabella Amore that just launched, Johnson finally addressed some mistakes made in year one of the transformation.
For the three months ended Feb. 2, the net loss ballooned to over six times the loss from a year ago to $552 million, or $2.51 a diluted share, from $87 million, or 41 cents. Excluding restructuring and other onetime charges, the adjusted net loss was $427 million, or $1.95 a diluted share.
Total net sales fell 28.4 percent to $3.89 billion from $5.43 billion. The quarter just ended even included an extra week of sales, as 2012 had 53 weeks. Excluding the extra week of sales, comparable-store sales fell 31.7 percent. Internet sales at jcp.com were $315 million in the quarter, declining 34.4 percent from a year ago.
The consensus among Wall Street analysts was a loss of 23 cents a share on sales of $4.08 billion.