J.C. Penney & Co. Inc. feels good about its performance.
That being said, there’s plenty of work left to do to return to profitability.
After reporting on Friday a narrower loss and a solid top-line performance for the third quarter, officials outlined exactly where the company needs repair work, and where it’s doing just fine.
Customers are returning to Penney’s and there are now approximately 87 million active customers, the same level as 2011 before the catastrophic Ron Johnson regime from 2011 to 2013 led to mass shopper defection to competitors.
Also, judging from the third-quarter figures, the business is improving — even in women’s. Major changes on the selling floors are ongoing, from center core to footwear and home, and Sephora continues as a top performer and is being rolled out to additional Penney’s doors.
“When you look at men’s and women’s apparel, they’ve been two of our strongest businesses for the first half of the year,” said chief executive officer Marvin Ellison. “In retail, that’s probably not as commonplace as you would think. So we’re very pleased.”
Ellison said there will be greater emphasis on special sizes.
But kids and home need serious repairs. Penney’s is “way too lean” in some key categories like sheets, towels and bedding. “We’re working on that, and to correct the promotional cadence in home,” Ellison said.
There’s also dissatisfaction with the rewards program but it’s undergoing a redesign that should be ready next year; Penney’s lags the competition on the omnichannel front also, though several initiatives are in the works and marketing needs to be less broad and more “one-on-one.”
Officials also said there’s a need to optimize private brand pricing to grow margins faster, and to bolster the supply chain to lower costs and increase efficiency.
“Although there’s much work to do and we have many areas of the business that require enhanced systems and process improvements, it’s clear that when we execute well, we can deliver profitable sales and take market share,” said Ellison.
On Friday, Penney’s reported that it narrowed its net loss for the second-quarter ended Aug. 1 to $138 million from $172 million in the year-ago period. Earnings per share came in a negative 45 cents a share, which was better than the anticipated negative 48 cents per share. Last year the discount retailer experienced a loss of 56 cents per share for the same period.
Same-store sales rose 4.1 percent, with total sales reaching $2.88 billion compared with $2.8 billion in the year-ago period.
Penney’s raised its guidance to full-year earnings before interest, taxes, depreciation and amortization of $620 million, higher than the previous guidance of $600 million. Penney’s goal is to reach $1.2 billion in EBITDA in 2017.
“We’ve done a much better job of planning our business this year and we are very confident that we would have a strong fall season,” said Ellison on Friday during the earnings conference call, the first that he handled since joining Penney’s last year, and after a transition period ascended to ceo, succeeding Myron “Mike” E. Ullman who became executive chairman.
Ellison said he’s confident Penney’s will hit its full-year guidance of a 4.5 percent comparable-sales growth. And Penney’s chief financial officer, Ed Record, said there’s been “a strong start” to the third quarter.
Last quarter, Penney’s did best with its Sephora in-store shops, which enjoyed double-digit same-store sales growth. Ellison wants to assure a long-term partnership with Sephora, which is one of Penney’s main attractions and key points of differentiation. He attended Sephora’s annual meeting this month and met with Sephora’s ceo, Calvin McDonald, and other management. “We have a great partnership with Sephora, and we will continue to allow and embrace the fact that they will be a part of our long-term growth strategy,” Ellison said. “We’re also very excited that we’ll see a significant increase in a number of new locations next year and beyond.”
Penney’s men’s, home and fine jewelry businesses also did well last quarter. But the home and kids departments still show wounds inflicted by the Johnson regime. Higher-priced merchandise, slicker presentations, and the cancellation of coupons led to a one-third decline in volume.
Last year, Penney’s generated $13 billion in sales and Ellison outlined several factors that should further lift revenues. Among them, recently enabling customers to order online and pick up their purchases in the stores, which leads to customers shopping more.
He said Penney’s is getting better at fulfilling online orders utilizing store inventories. With more than 1,000 brick-and-mortar locations, “leveraging enterprise inventory provides us with a great opportunity for stores to act as fulfillment centers.” Penney’s this year is piloting same-day delivery of online orders to stores and to customers’ homes for 2016 rollouts.
Omni efforts have been boosted by investments in Oracle systems during the last few years, to improve the merchandising, planning, sizing and localization of assortments, and by two recent hires. Mike Amend, former vice president of online, mobile and omnichannel for the Home Depot, has become Penney’s executive vice president of omnichannel, and Mike Robbins, former senior vice president of global supply chain for Target stores, has become Penney’s senior vice president of supply chain.
Sales growth is also expected through investments on the selling floor. Men’s and women’s shoe departments have been separated and converted to open sell; hair salons are being rebranded in collaboration with InStyle magazine; and handbag areas are being reinvigorated with better products, including new bags from Liz Claiborne sold exclusively at Penney’s. Penney’s has also reset space for fashion jewelry, accessories and intimates. Ellison is aiming to strengthen the center core floors, with 12 pilots in place and roughly 500 seen in 2016.
With expenses, SG&A decreased $63 million due to reductions in store controllable expenses and advertising, and increased revenue from the store credit card. “Minimum wage rate increases are a leading topic in our industry, and we continue to monitor the situation on a market-by-market basis to ensure that we remain competitive in our ability to attract top talent,” Record said.
Penney’s expects to save approximately $120 million this year. “We are committed to achieving an expense structure that makes sense for our business,” Record said.
Inventory is up 5.5 percent over last year, partly due to a back-to-school tax-free event that shifted into the third quarter, which also impacted second-quarter sales, and also due to building inventory levels this year in response to running lean last year. “Having said that, we feel very good about our inventory content and the levels heading into the second half,” Record said.
“To summarize, the three strategic priorities of private brands, omnichannel and increased revenue per customer will become our strategic framework,” Ellison said. “This framework will allow us to simplify our focus and allocate capital and resources to areas of the business that will simply make us a better company.”
“We believe that we will start to see true benefits of our omnichannel strategy in the second half of 2016. We are seeing improvements with enterprise inventory today. I mean, we are able to fulfill more dot-com orders that historically would’ve been simply out of stock because we can bounce the fulfillment from our distribution centers that services dot-com to roughly 250 stores, and we can fulfill the order from those locations. That’s a huge benefit,” Ellison said.
“The other benefit is we’re capturing that data. And we’re updating the replenishment in the in-stock performance in the DCs to reflect the fact that they were out of stock when an order came through. We’re also going to be very aggressive in expanding our assortment online. I would argue that we have one of the most conservative assortments online of any large retailer.”
Asked about the health of the store fleet, Ellison said, “Candidly, we would love to have more capital spend. Having said that, if you look historically over the last five years, a significant amount of capital was put into the stores. And as I said earlier, when the board and Mike Ullman first approached me to consider coming to J.C. Penney, I candidly had not been in a J.C. Penney in quite a while. And so I started to go around the country, and just pop into stores to get a sense of the culture and the sense of how the business was running. And my first takeaway was the stores looked really good. And I was surprised because the Penney’s I remember was a little tired and a little worn. But I would have to admit that although some of the capital investments were not well thought-out, and they have not been accretive to the business, they’ve done a really nice job of cleaning the stores up, brightening the stores and making them more modern.”