In J.C. Penney’s turnaround bid, it’s getting increasingly apparent that success largely hinges on apparel — and women’s apparel is where the most work has been needed.
“We spent an enormous amount of time over the past 18 months fixing our apparel assortment and making necessary changes,” Marvin Ellison, J.C. Penney Co. Inc.’s chairman and chief executive officer, said Thursday during a conference call after the company reported a reduced net loss for the first quarter, along with a decline in total sales and a small comparable-store gain.
Among the fashion objectives: catch up in activewear via partnerships with Nike Inc., Adidas AG, Champion and Puma; bring newness more frequently to the women’s apparel floor, and pump up dresses, contemporary, casual sportswear and special sizes. In special sizes alone, Ellison sees a $100 million growth opportunity in 2018.
“When we look at women’s apparel, we can see specific indications of that business as very healthy when we have seasonal weather trends, the same with kids. And so apparel is the most significant initiative for us to grow positive comps,” Ellison said.
The $12.5 billion Penney’s chain continues to suffer losses and has a long way to go in its recovery. The company was profitable in the fourth quarter of 2017, but had a loss for the year overall.
A sense of urgency creeped in Thursday when Penney’s reported disappointing results for the first quarter, which were all the more disappointing considering the strong first-quarter results reported by Macy’s Inc. the day before. Penney’s reported that it cut its net losses for the quarter ended May 5 down to $78 million, from $187 million in the year-ago period. But adjusted losses widened to $69 million from an adjusted loss of $2 million a year ago. Adjusted losses account for the sale of operating assets of $17 million this year and $117 million a year ago.
Comparable sales only increased 0.2 percent in the first quarter, aided by a rise in average unit retail and units per transaction. Total net sales decreased 4.3 percent to $2.58 billion from $2.7 billion a year ago primarily due to the 141 store closings last year. Other factors impacting the business were sluggish trends in women’s apparel, which Ellison said was affected by cool weather in April, and a onetime process issue in the pipeline of dot-com merchandise.
Wall Street was clearly disappointed, sending Penney’s shares down 34 cents, or 11 percent, to $2.33 around midday.
Still, Ellison believes Penney’s turnaround strategy is working. Aside from the apparel play, it involves adding categories such as appliances, health and wellness and toys; continuing to add Sephora shops in more Penney’s doors; cutting expenses, and trimming debt. Penney’s wants to capture market share from the competition, including liquidating Bon-Ton Stores and Sears Holdings Corp. and Kmart Corp., which have been closing stores.
“Overall, we’re confident enough that our strategic plan is working, and this is evidenced by the sales recovery we experienced in the final two weeks of April when the temperatures begin to normalize,” Ellison said.
There were some bright spots in the quarterly report, including men’s wear, particularly casual and big and tall areas; Sephora; fine jewelry and salons; appliances and furniture, and mattresses, which all did well, and overall sales for May so far are good, according to Ellison.
“We had a strong start to the first quarter, with February and March comps ahead of our annual guidance range, however, our April results were negatively impacted by unseasonable weather,” said Ellison.
The ceo summarized the first quarter by indicating continued strength in beauty (led by Sephora) as well as in fine jewelry and the salon business. He cited “a great performance in home refresh initiatives, specifically appliances, furniture and mattresses, a return to positive sales in men’s apparel, and continued revenue growth in omnichannel.
He estimated that without the impact of weather, comp sales would have been a plus-1.5 percent for the quarter, or a point more than reported.
For this year, Penney’s expects comp-store sales to remain in the range of flat to up 2 percent, and adjusted earnings per share are expected to be in the range of a negative 7 cents to a positive 13 cents a share, down from a previous forecast. Comp sales in the second quarter are expected to be in the middle of the annual guidance range.
In other changes for this year, Penney’s plans to open 27 more Sephora shops this year, bringing the beauty brand to 75 percent of the Penney’s chain; another 100 salons will be remodeled and re-branded InStyle, and the company is in the early stages of a partnership with FitBit to sell health and wellness products.
On the omnichannel front, Ellison said “although we experienced some process challenges that impacted gross margin in Q1, we’re pleased that today, approximately 80 percent of our existing inventory is now eligible for free same-day pickup. One hundred percent of our brick-and-mortar store network is being utilized for online fulfillment and nearly 40 percent of our dot-com orders are picked up in the store and while in the store, over one-third of our customers make additional purchases.
“This is arguably the most challenging and competitive retail market that we’ve seen in over 50 years,” Ellison said. “Over the past three years, we’ve taken significant steps to de-risk our business and improve our balance sheet. Specifically, reducing outstanding debt levels and proactively refinancing. These financial improvements have stabilized our company and position J.C. Penney to take advantage of available market share opportunities as other retailers continued to struggle. To that point, we have identified over 300 malls where we will aggressively pursue sales opportunities given to us by other retailers in 2018. And the vast majority of these malls are highly rated and will provide incredible market share opportunities as we continue to enhance our merchandise assortment, which includes appliances, mattress, furniture and workwear. In addition, we see opportunities to capture market share in baby gifts, footwear and our new toy category based on competitive dynamics.”
Ellison said Bon-Ton store closings are having no material impact on the Penney’s business, but Sears closings in particular benefit Penney’s appliances, mattress and workwear categories.
“Still, we have structural opportunities with organizational layers that we need to address. We have opportunities to continue to invest in technology, improve service and continue to lean into our markdown optimization,” he said.