J.C. Penney Co. Inc.’s 21-month-long top-line losing streak is over, but the quest for profitability continues.
This story first appeared in the November 8, 2013 issue of WWD. Subscribe Today.
The company said Thursday that in October, it experienced its first month of positive comparable-store sales since December 2011, a 0.9 percent advance that was supported by a 37.6 percent upswing in online sales.
December 2011 same-store sales rose 0.3 percent. The company discontinued reporting comps on a monthly basis immediately afterward and has since reported them in tandem with its quarterly results.
From a sales perspective, those results have declined at a double-digit rate since. Comps for 2012 were off 25.2 percent, slightly greater than the 24.8 percent decline in net sales, to $12.99 billion. This year, first-quarter comps dropped 16.6 percent and the number moderated further, to an 11.9 percent decline, in the second quarter. Penney’s September comps declined 4 percent.
The performance update provided by Penney’s — on the same day that stores still tied to the ritual of monthly reporting checked in with stronger-than-anticipated results — was hardly a celebration. Average unit retail prices and traffic were down last month, although the troubled midtier retailer did register year-over-year improvements in average transaction value and units per transaction. Gross margins remained depressed by significant amounts of clearance merchandise, the company said, but improved throughout the just-completed third quarter.
Myron “Mike” Ullman 3rd, who rejoined Penney’s as chief executive officer in April after the troubled tenure of Apple and Target alumnus Ron Johnson, noted that the increase came “despite the federal government shutdown and a challenging consumer environment.” He pointed to “significantly improved sales trends” in home, Penney’s best performer last month, as well as in men’s apparel and women’s accessories.
At last month’s WWD Retail and Apparel CEO Summit, Ullman said that under his predecessor, home departments “looked spectacular,” but in some cases “the merchandise was too modern and the aesthetic didn’t resonate with customers.” He estimated it would take another three or four months to align the category with “traditional customer expectations.”
Much of the improvement was attributed to what the company termed a “restoration” of key private brands that were either downplayed or discontinued during the Johnson era, including St. John’s Bay and Stafford. The Plano, Tex.-based company also registered “significant” sales increases from national brands such as Levi’s, Dockers, Nike, Izod and Vanity Fair.
Customers were insistent on a return to familiar terrain, even after Penney’s took the unusual step of issuing an apology to its alienated customer base. “Customers liked the apology, but they said, ‘Enough apology. Give us St. John’s Bay. Give us Sephora.’ Her patience was wearing thin in terms of not finding what she wanted. We see our customer as having too little time, too little money and two little kids,” the ceo said at the WWD summit.
Thirty Sephora shops were added during the month, raising the total to 446 locations.
Analysts remain concerned about Penney’s cash burn rate and its still-uncharted road back to profitability after its $552 million net loss last year. Investors embraced the good news, sending shares up 43 cents, or 5.6 percent, to $8.13. Still, they closed over $10 a share as recently as Sept. 26.
“In our view, the key selling period is only beginning,” wrote Goldman Sachs analyst Stephen Grambling in a research note, “making the November trend more important when JCP reports their 3Q results on Nov. 30.” The strength of sales online was seen as auguring well for overall results, as e-commerce offerings can be configured more rapidly than those in stores.
On average, analysts expect Penney’s to lose $1.75 a diluted share in the third quarter, well above the 93-cent year-ago loss. Revenues are seen falling back to $2.8 billion from $2.93 billion in the comparable 2012 period.
Arnold Aronson, managing director of retail strategies at Kurt Salmon, said, “In our business, there’s really no such thing as a moral victory, but this is significant in that Mike can show a direction that hasn’t been shown in nearly two years. Returning to Penney’s, he was dealt as tough a hand as anyone could be dealt. So many things needed to be done — organizationally, from a product point of view, in marketing, customer service and vendor relationships. Even among their competitors, there aren’t too many people who aren’t feeling a little bit of good-heartedness about this.”
Aronson said Ullman has been wise to stick with proven principles in his second tour of duty as Penney’s ceo. “The most important thing that a stabilizer has to do is play on his established strengths,” he said. “This is like a relief pitcher sticking to his best pitch in a crucial game. They’re emphasizing strong brands and good values, the things they were known for.”
Ullman declined a request for an interview Thursday but struck a somewhat triumphant tone in Penney’s press release. “As we look ahead, we are fully prepared to execute our aggressive plans for the holidays, including opening at 8 p.m. on Thanksgiving Day,” he said. “We will soon be unveiling new marketing to better communicate the unique value and stylish merchandise assortment we offer. We expect the holiday season to be extremely competitive, and we are ready to win.”
Penney’s upbeat report came on a day when the retailers remaining in the monthly comp base virtually all reported better-than-anticipated results, with cool weather and improving trends since the end of the government shutdown helping to produce a 3.7 percent gain in aggregate comps, nearly twice the 2 percent expected by analysts polled by Thomson Reuters. Gap Inc., expected to tick up just 0.1 percent for the month, was up 4 percent, with Gap, Old Navy and Banana Republic ahead 5, 2 and 1 percent, respectively.
L Brands Inc., formerly Limited Brands, blew by expectations for a 2.2 percent comp increase as corporate comps rose 8 percent and those at Victoria’s Secret, expected to rise 2.3 percent, led all brands reporting with a 10 percent pickup.
Only one retailer failed to beat expectations — Zumiez Inc. was up 1.2 percent versus a 1.7 percent estimate — and American Apparel Inc. was the only one of the reporters to register a decrease as it continued to struggle to improve the efficiency of its new distribution center. Comps were down 1 percent, with a 3 percent decline in same-store sales overwhelming a 12 percent increase in online revenues.