J.C. Penney Co. Inc. believes it’s in the third and final leg of its turnaround.

This story first appeared in the February 27, 2014 issue of WWD. Subscribe Today.

“We’ve restored calm and clarity of purpose with suppliers, shored up our financial position and have rebuilt Penney’s from the inside out,” Myron “Mike” Ullman 3rd said Wednesday during a conference call after the company reported a net profit of $35 million for the fourth quarter ended Feb. 1. This compares with a loss of $1.4 billion a year ago.

Still, it wasn’t all good news for Penney’s. On an adjusted basis, which excludes restructuring and management transition charges and tax and asset sale benefits, the retailer reported a net loss in the quarter of $206 million. And net sales were slightly down to $3.78 billion in the three months, versus $3.88 billion the year before, though comparable-store sales rose 2 percent.

Home, men’s apparel, women’s accessories and Sephora Inside J.C. Penney were the company’s top-performing merchandise divisions. Gross margin was 28.4 percent of sales, compared to 23.8 percent in the same quarter last year, representing a 460 basis point improvement. Gross margin included a negative impact of 190 basis points associated with the discontinuation of brands that are not part of the company’s go-forward merchandising strategy, Penney’s fourth-quarter numbers stood out not only because they beat Wall Street’s expectations but also because they came on the same day that other major retailers reported quarterly earnings declines, namely Abercrombie & Fitch Co., down 58 percent, and Target Corp., down 46 percent.

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For the year, Penney’s lost $1.39 billion, versus a loss of $985 million the year before. Sales came to $11.86 billion, down from $12.98 billion the year before; comp sales declined 7.4 percent. The retailer ended the year with total available liquidity in excess of $2 billion, which includes a $500 million revolving line of credit.

Looking ahead, Penney’s projected comparable-store sales up 3 to 5 percent in the first quarter, with gross margins expected to improve versus last year’s first quarter. For the year, comparable-store sales are seen up midsingle digits, while gross margin is expected to improve significantly.

Ullman said he anticipates the turnaround will be complete in 2014 and went out of his way to dispel lingering industry concerns over liquidity, saying Penney’s is “not burning cash in the process of finishing the turnaround.”

Brands that were recently dropped include JCP men’s, Stafford Prep, Joe by Joseph Abboud, William Rast, Joe Fresh Kids and JCP Everyday. American Living and Joneswear were dropped previously.

Penney’s is also “right-sizing” some other brands such as Joe Fresh in women’s apparel, Michael Graves Design, Conran and several other brands in home.

In their place, “We brought back key items and popular brands customers wanted, and edited out unwanted brands. We fixed jcp.com, improved its merchandise content, restoring inventory levels and enhancing the online experience,” Ullman explained.

The focus has been on restoring basics, private brands and managing expenses with $1 billion in savings for 2013, over 2011 levels. Private brands under the previous regime had been sliced down to 30 percent of the assortment, from 50 percent. Key private brands getting pumped up include St. John’s Bay and a.n.a., while key national brands such as Nike, Levi’s and Dockers are also being emphasized. “Our assortments must grow to be narrow and deep,” Ullman said. Also, 46 new Sephora shops inside Penney’s will open this year, bringing the total to 492 locations.

Major surgery is being performed on the home floor, which in a few weeks will have a new look. Ullman cited “a renewed focus on bedding and bath, small electronics and decorative home collections,” as well as a return to the emphasis on traditional products, soft home and more opening prices. Parts of women’s and intimates are also being transformed.

Discussing the overall turnaround of the business, Ullman said, “We are pleased with how quickly the business came around with these few strategic adjustments….The most challenging and expensive parts of the turnaround are behind us.”

Penney’s did take a hit to margins in the fourth quarter largely stemming from clearing out discontinued brands. The company is closing 33 underperforming stores, which will all be shuttered by the beginning of May.

On a brighter note, Ullman said Penney’s is opening in Brooklyn later this year, which he characterized as a “store of the future” and that for the chain “traffic versus the industry has improved sequentially. It’s still negative but outpaced the industry.”

The first two phases of Penney’s turnaround — stabilization and rebuilding — are complete, Ullman said. “This year we are progressing to the go-forward phase.”


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