“We’ve turned the corner.”
This story first appeared in the November 21, 2013 issue of WWD. Subscribe Today.
That was the upbeat assessment of J.C. Penney Co. Inc.’s chief executive officer Myron E. “Mike” Ullman 3rd in a conference call to Wall Street analysts. And while the company reported a substantially wider third-quarter loss compared with a year ago — $489 million versus $123 million — Ullman’s optimism spread to the retailer’s shares, which jumped 8.4 percent to close at $9.44 on the New York Stock Exchange.
Even as skepticism remained about how fast Penney’s can turn its operations around, what has investors hopeful were some positives in Ullman’s remarks, including improved sales trends in men’s and women’s apparel, as well as fine jewelry, and the continued expectation that the retailer will have positive comps for the fourth quarter.
“Let me start off by saying that the turnaround at J.C. Penney is beginning to take hold,” Ullman said. “We’re making significant strides toward restoring J.C. Penney to its rightful place in retail.”
Ullman said the home category is being remerchandised, and the company expects to have that completed in the spring. “And we continue to expect to deliver positive comps for the fourth quarter,” he said.
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The ceo noted that gross margins, currently 29.5 percent of sales versus 32.5 percent a year ago, were lower due to the impact of clearance sales to eliminate inventory overhang and to transition back to the promotional pricing strategy the company is known for.
“The good news, however, is we’re putting back in place the components necessary to return to historical gross margin levels [and] we’ve reinstated the engine of profit margin growth by getting our private brands back in stock and across our entire fleet of stores on jcp.com….
“[W]e’re restoring initial markups necessary to support the return [to a] promotional department store strategy. The environment, as you know, is very aggressively promotional, and we must and will compete to win. That means initially marking up our goods to sufficient levels to protect our margins” when the discount sale is applied, the ceo said.
He also addressed criticism that the company has been “giving the merchandise away,” noting that “[t]here is no remarkable difference between the margins we’re obtaining on promotional markdowns through our major events than there was in 2011.”
One negative has been shrinkage, which added 100 basis points on margins in the third quarter, although Ullman said the company is putting processes in place to control inventory shortage, otherwise known as employee theft and shoplifting, in its stores. Shrinkage rose due to the removal of security tags when the prior management team planned to track merchandise using radio frequency identification technology.
Ullman added that having the right marketing is just as important as the right merchandise. “We need to drive traffic by communicating…in a clear and compelling way. Our first step has been to ensure that our customers know that meaningful promotions are back…that if you want great value, we’re the place to be,” he said.
Ullman said the management team is “pleased with the progress being made and we believe we’ve turned the corner.” He added later in the question-and-answer session that sales in October and into November have been “progressively improving,” and that promotions during holiday will “vary by week and by promotion.” He also noted to analysts that shoppers at department stores are there six to 12 times a year, compared with those who do their weekly visits at mass discounters. Consequently, it “takes a while for the customer to realize we are back in business, that we have…the price promotion that they enjoy.”
Citigroup’s credit analyst Janna Giannelli said the third-quarter revenue and comp declines were in line with her estimates, but Penney’s had a higher-than-expected cash burn. She also noted that the total liquidity at the end of the quarter of $1.71 billion was lower than her expectations on inventory build and slightly higher than expected capital expenditures. She had forecasted $2.16 billion in end-of-quarter liquidity.
Penney’s said it expects total available liquidity to be in excess of $2 billion at yearend.
The credit analyst said, “We are encouraged by the directional cadence of same-store sales improvement…[W]e believe J.C. Penney needs accelerated top-line improvement to plug its cash burn.”
For the quarter ended Nov. 2, the net loss widened to $489 million, or $1.94 a diluted share, from a year-ago loss of $123 million, or 56 cents. On an adjusted basis in both periods, the net loss was $457 million, or $1.18 a diluted share, compared with a year-ago loss of $203 million, or 93 cents.
Sales fell 5.1 percent to $2.78 billion from $2.93 billion. Comparable-store sales were down 4.8 percent in the quarter, although there was sequential improvement of 710 basis points compared with the second quarter of 2013. Online sales rose 24.5 percent for the quarter and were at $266 million.
For the nine months, the loss widened to $1.42 billion, or $6.17 a diluted share, from a loss of $433 million, or $1.98, last year. Sales were down 11.3 percent to $8.08 billion from $9.1 billion.
While Ullman was confident that Penney’s has passed its low point, the same can’t be said of the opinion of some equity analysts.
Wells Fargo analyst Paul Lejuez still has his “underperform” rating on shares of Penney’s stock, noting that “we believe J.C. Penney has been burned by the effect of an unsuccessful turnaround strategy, which has created a hole that is likely too deep.”
Sterne Agee analyst Charles Grom has a “neutral” rating on the stock, noting that “while comp trends have improved directionally, we’ve been surprised that the ‘slope’ of the improvement has not been greater, particularly considering the compares from last year.”
Separately, L Brands Inc., formerly Limited Brands, reported third-quarter results after the markets closed. For the period ended Nov. 2, net income rose 25.4 percent to $92 million, or 31 cents a diluted share, from $73.4 million, or 25 cents, in the year-ago quarter. The earnings per share were 3 cents better than the analysts’ consensus estimate of 28 cents.
Revenues, disclosed when L Brands reported comparable-store sales on Nov. 7, rose 5.9 percent to $2.17 billion from $2.05 billion and were up 3 percent on a comp basis.
The company will hold a conference call today to discuss the results.