Two of the nation’s largest retailers, Macy’s Inc. and J.C. Penney Co. Inc., fell short on the top-line last quarter – raising some fourth quarter concerns – but managed to improve bottom-line results.
This story first appeared in the November 13, 2014 issue of WWD. Subscribe Today.
“Honestly, the third quarter was softer than I hoped or expected,” Terry Lundgren, Macy’s chairman and chief executive officer, told WWD. “But we thought it would be challenging, since we were going against tough numbers for sure,” Lundgren said, referring to the 4.6 percent increase in the year-ago period.
While the top-line results don’t bode well for the holidays, executives from Macy’s and Penney’s gave assurances they’re up for the challenge.
Lundgren told WWD that he’s expecting Q4 to show more life than Q3, with the weather outlook better than last year’s brutal cold spell, a more efficient flow of merchandise receipts this year, the rollout of buy-online-pickup-in-stores, and over $10 million more allocated for fourth quarter marketing, largely for digital marketing and events. The marketing dollars were pulled out of the third quarter budget. Still, Macy’s revised downward its full-year comparable sales forecast, including licensed departments, to a 1.2 percent to 1.5 percent gain, compared to previous guidance of 2 percent to 2.5 percent. It also revised down its profits outlook.
Macy’s lifted its net earnings 22.6 percent to $217 million in the third quarter ended Nov. 1, from $177 million in the year-ago quarter. Comparable sales, excluding licensed departments, were down 1.4 percent. Including departments licensed to third parties, comps were down 0.7 percent. Total sales were $6.2 billion, down 1.3 percent from $6.3 billion in the 2013 quarter.
Similarly, J.C. Penney’s ceo Myron “Mike” Ullman said that despite the retailer’s disappointing third quarter sales tally, it is projecting a 2 to 4 percent comp sales gain in Q4. “We’re well prepared, better prepared than last year,” Ullman told WWD. “We’re pleased with sales during the first ten days of November.”
He also said Penney’s is in “the final phase” of its turnaround and that “we expect to continue to gain share.”
Among Penney’s biggest challenges are returning to profitability, and continuing to rebuild its home and online businesses, though home was identified as a best-selling area last quarter. Ullman said the company is “clawing back” with its home business. Among the issues being corrected are having too much housewares and being under-spaced in window treatments. Penney’s is also figuring out exactly what type of layout customers prefer to shop, and to what degree there should be classification merchandising versus shops-in-shop.
Penney’s lowered its loss for the third quarter ended Nov. 1 to $188 million, from $489 million in the year-ago period. “We did a good job of managing the business more profitability this quarter,” Ullman said.
Total sales were essentially flat, reaching $2.76 billion last quarter compared to $2.78 billion in the third quarter of 2013. Same-store sales were also flat. “Like most retailers, following a strong start to the back-to-school season, sales did slow in September and October as unseasonably warm weather hindered the sale of fall goods,” Ullman said.
Still, the bottom-line financial results exceeded the firm’s expectations, with gross margin expansion of 710 basis points, and a $342 million improvement in earnings before interest, taxes, depreciation and amortization.
In addition to home, fine jewelry and Sephora were the company’s top performing areas last quarter. Asked to provide some color on the women’s apparel performance, Ullman singled out the Worthington, a.n.a., Liz Claiborne and Xersion private brands as where he’s most enthusiastic for the fourth quarter, based on recent results. On the men’s side, the Stafford and J. Ferrar private brands were cited. Private brands account for 50 percent of the Dallas-based department store’s total mix.
“Our customers are back but we know we need to increase their trips and their spend at J.C. Penney,” Ullman said during a conference call, where he introduced Marvin Ellison, who started working as the retailer’s president and ceo-designee last week and takes the reins from Ullman in August.
He went on to say, “We recognize we have opportunities in December and January that we didn’t exploit last year so we see that as upside…Competition is certainly rigorous and fierce, but I don’t think it’s anything we haven’t seen before.” He added that the promotional cadence is changing to be “a bit more promotional on the weekends.”
Regarding a worker dispute at West Coast ports, Lundgren and Ullman said the impact has so far been minimal, with Ullman noting that Penney’s was seeing “some impact from the situation in Los Angeles but it is manageable.”
“We had a big receipt this week getting ready for the holiday,” Lundgren said, noting some deliveries were accelerated in light of the port situation. “We’re in good shape at the moment but want to keep the pressure on the subject so we are not negatively impact. The port situation is a threat. I have been personally involved and have communicated with President Obama’s office. This could be a negative issue for economy if it isn’t resolved quickly.”
For Macy’s last quarter, the best-selling categories were fragrances, handbags, active, Millennial apparel, and men’s, particularly men’s sportswear, and private brands. On the weak side were women’s shoes, non-Millennial women’s apparel, kids, cosmetics and home.
Merchandise margins were down 0.1 percent, while inventory was up 1 percent compared to last year’s period.
For the fourth quarter, “We do expect competition to be fierce, but we are ready and we believe we can deliver our sales expectations for the quarter. Going forward we see signs we might have a bit more tailwind from improved customer sentiment, higher employment and lower gas prices. We’re not counting on a lot of help from the economy this holiday but every little bit helps.”
Macy’s revised its 2014 guidance downward, stating that earnings per diluted share for the full-year 2014 now are expected in the range of $4.25 to $4.35, compared with previous guidance of $4.40 to $4.50.
As far as the bottom line improvement, Lundgren said a major reason was a $100 million program of expense cuts, covering a wide swathe, so expenses would be more in line with sales expectations. The program was revealed last January. “Those strategies are paying off now,” Lundgren said.