J.C. Penney, heading into another highly promotional second half, is “laser-focused” on repairing its apparel business and putting greater emphasis on casual, contemporary, activewear and special sizes.
“Women’s apparel is a significant percent of our overall revenue, and that business has been under significant pressure for the last year-plus. And although we’re excited about home initiatives and beauty, we also are laser-focused on fixing the women’s apparel business,” said Marvin Ellison, Penney’s chairman and chief executive officer.
Ellison’s comments on Penney’s apparel business, along with those from Penney’s chief merchant John Tighe, came on Friday, just after the $12.5 billion Plano, Texas-based retailer issued its second-quarter results.
Executives said Penney’s apparel business underperformed the company’s overall comp sales result, and that the retailer’s bottom line was hurt by liquidations at stores being closed, leading to reduced margins. Shrinkage was also greater than expected. The net loss in the quarter ended July 29 was $62 million, or 20 cents a share, versus $56 million, or 18 cents a share, in the year-ago quarter. The adjusted net loss was $28 million versus $10 million a year ago.
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Total sales increased 1.5 percent to $3 billion compared with $2.9 billion in the year-ago period, while comparable sales declined 1.3 percent.
“We anticipate that the marketplace will remain very promotional,” Ellison said. “There may be some accelerated promotional activity in the second half of the year versus what we’ve traditionally seen, but we are prepared for that. It is built into our earnings guidance, and even with that, we are very confident that we will meet our earnings guidance for the second half of the year in the face of what we think will be a slightly more promotional environment.” For fiscal 2017, Penney’s expects comparable-store sales to fall between negative 1 percent to plus 1 percent, and adjusted earnings per share to range from 40 cents to 65 cents.
Ellison, during a conference call with investors, said the apparel performance has improved. As recently reported by WWD, women’s apparel represents 24 percent of J.C. Penney’s annual revenues. Women’s accessories, jewelry and Sephora account for another 19 percent of the business; men’s apparel and accessories, 22 percent.
“Kids’ was our toughest business in Q1, and in the second quarter, we took learnings that drive improvements in women’s apparel business to enhance our performance in kids’, including meaningful assortment changes particularly in special-size categories of girls’ and boys’ husky,” Ellison said. “And these changes drove over a 700 basis point comp improvement in kids’ from Q1 to Q2. In fact, I’m pleased to report our continued focus on the special-size business allowed us to deliver a 700-basis-point trend improvement in our total special-size businesses across women’s, kids’ and men’s. And we’ll intensify our commitment to being a destination for special-size apparel for all customers.”
As special sizes, casual and contemporary women’s offerings gain ground, Penney’s is downsizing traditional women’s clothing. Such brands as Nike and Adidas are playing bigger roles, as are Penney’s private brands such as the Exertion active label, and the exclusive Libby Edelman “lifestyle” fashion collection by Libby Edelman, cocreator of Sam & Libby and Sam Edelman footwear. It debuted with a teaser collection in 500 retail doors July 14, and will have its full launch Sept. 8. In addition, denim statements are being strengthened.
“We see women’s apparel improvement continuing as we move through fall,” said Tighe. “We have a really deep effort to launch more contemporary clothing.”
“The last part of growing the apparel business is understanding the customer. We did a huge deep dive into who our customer is; we reorganized our whole women’s apparel — both merchant design and product development teams — to be aligned by the customer segments.” Tighe also said Penney’s is bringing “faster fashion to the floor with great value. You will see a huge change in the floor as we move through September.”
As Ellison sees it, Penney’s was slow to react to the changing trends in how women dress, up until recently.
Though the quarter was down, Ellison cited several “key wins” including sequential comp sales improvement of 220 basis points from Q1 to Q2, total sales growth; effective management of inventory, which was down 6.8 percent last quarter; the rollout of ship-to-store and online fulfillment at all stores; reduced corporate overhead; and increased cash flow. Executives said they they are pleased with the start of back-to-school selling.
But Penney’s said the closing of 127 stores last quarter had a greater impact than expected. “The liquidation of inventory in these stores had a negative impact on margins of approximately 120 basis points, and this was much greater margin dilution than we anticipated,” Ellison said. “While 120 basis points of margin is significant, it’s isolated to Q2 and we see this as a one-time event. We’ve never liquidated this many stores at one time so it was very difficult for us to forecast the margin impact in advance.” Margin for the second quarter was 35.1 percent of sales, a decline of 200 basis points compared to the same period last year. Back in February, Penney’s said it slated 138 store closings, in an aggressive downsizing of the fleet. Penney’s operates a total of about 875 stores.
“Home and beauty, which consists of fine jewelry, salon and Sephora, delivered positive sales in the quarter,” Ellison said. “We’re also pleased we were able to deliver positive comps in shoes and handbags for the second quarter.” Penney’s continues to add Sephora shops and expand others, continues to rebrand salons to InStyle, expand its mattress footprints, and roll out toys for b-t-s.
Geographically, the Southwest and Southeast were the best-performing regions of the country. The Northeast was the worst-performing region.
Penney’s also touted its debt-reduction efforts to improve the balance sheet. In May, the company completed a $300 million tender on portions of 2018 and 2019 outstanding bonds, reducing the aggregate principal amount outstanding on the maturities to levels below $200 million. Proceeds from selling the home office in Plano and cash on hand funded the tender offer. The retirement of the bonds is expected to contribute annualized interest expense savings of $23 million.