J.C. Penney Co., Inc. is taking its medicine and it’s not going down easy.
The $12 billion middle American department store chain reported losses and negative comparable sales for the first quarter of 2019 and continues to slash inventories and close stores.
But Penney’s is nearly done rebuilding its leadership, has begun testing ideas around assortments, and is redesigning “core” store processes such as checkouts and labor efficiencies to improve the shopping experience. Penney’s also maintains a positive cash flow and will be able to meet modest debt maturity obligations of about $50 million this year and $110 million in 2020.
“Sometimes the business can get a little bit worse before it gets better. This year, we are focused on re-establishing what we need to,” observed Jill Soltau, Penney’s chief executive officer, discussing the retailer’s state of affairs.
Soltau, the company’s ceo since last October, has been deep into learning what changes must be made for the business to survive, and how to reconnect with customers and give them what they want from the store.
On Tuesday, Penney’s reported a net loss of $154 million for the first quarter ended May 4, almost double the year-ago loss of $78 million.
Comparable sales decreased 5.5 percent, and are expected to continue to be down through the year. The exit of the major appliance and in-store furniture categories in the first quarter had a combined negative impact of 20 basis points to comparable sales.
Total net sales decreased 5.6 percent to $2.44 billion, compared to $2.58 billion for the quarter ended May 5, 2018.
Fine jewelry, children’s, women’s and men’s apparel were the top-performing categories during the quarter. Within women’s, dresses, active, Liz Claiborne and a.n.a. were the standouts. Fine jewelry saw most strength in Modern Bride, gold and fashion gems. Children’s did best in young boys, baby and gear businesses, and men’s apparel fared best in active, licensed and big and tall areas.
The 860-unit retailer expects $1.5 billion liquidity throughout the year, and has planned for 18 full line and nine furniture store closings this year.
Soltau, in a conference call, cited several areas where progress was made, citing inventory as down 16 percent last quarter, following a 13 percent reduction at the end of 2018, and with tapping talent to fill top jobs. In her latest hire, Shawn Gensch, a 25-year veteran of marketing and finance, was named executive vice president and chief customer officer.
“Shawn will be instrumental in developing a compelling brand identity that builds meaningful connections with new shoppers, and strengthens relationships with our most loyal customers,” said Soltau. “In Shawn’s early days, he will be very focused on personalization and engagement and reconnecting with the customer. He will be the individual next to me who always keeps the customer at the center of what we do.”
Gensch will oversee marketing strategies and initiatives including digital, advertising, creative design, customer research, loyalty, analytics and insights, social media, sales promotions and planning and events marketing. He was last with Sprouts Farmers Market as chief customer officer. Earlier, he cofounded and served as ceo of iAMroyalist Inc., a consumer-driven loyalty platform. Before that, he spent 10 years at Target Corp. working as senior vice president of marketing and president of Target Bank. Before Target, Gensch worked in the structured finance, insurance, banking and related consulting industries. He began his career at KPMG.
Soltau has overhauled almost the entire top management. “We have most of the key roles in place.” She is searching for a head of e-commerce.
Over the last few months, aside from Gensch, Soltau has named five other executive vice presidents: Michelle Wlazlo, chief merchant; Bill Wafford, chief financial officer; Brynn Evanson, chief human resources officer; Therace Risch, chief information and digital officer, and Mike Robbins, chief stores and supply chain officer.
In addition, Laurene Gandolfo was named senior vice president of home product design and development, and Truett Horne was named senior vice president and chief transformation officer. Several other svp’s were also named.
Soltau opened up the conference call warning about China tariffs. “There is a minimal impact on our business resulting from the three tariff tranches that went into effect last year, including the recent increase on the third tariff tranche that went into effect on May 10, which increased tariffs from 10 to 25 percent. However, in looking ahead, we do anticipate a more meaningful impact on both our private and national brands if the potential fourth tranche of tariffs does go into effect on all Chinese imports.
“Having said that, our teams will continue to work through, where possible, de-risking efforts with key partners. Of particular note and given our sourcing capabilities, we have been proactive in developing contingencies for sourcing our private brands for the better part of the last several years and meaningfully diversifying our country of origin. This has allowed us to significantly reduce our exposure to China, which is already lower than industry averages.” About 50 percent of Penney’s business is through private brands.
Soltau stressed the company must improve on “the fundamentals of retailing,” which translates to creating “a compelling assortment that is focused, edited, relevant and easy to shop; and marketing that communicates a strong value proposition, inspiring our customers and inviting them to engage with us more frequently.”
With the inventory reductions, Penney’s experienced increased sell-throughs in all divisions and improved selling margins in most merchandise divisions during the quarter, Soltau said. That’s led to expectations for improved gross margin performance in 2019.
Aside from dropping big ticket appliances and removing furniture from stores but not online, hundreds of thousands of unproductive factory-shipped stockkeeping units were removed from Penney’s web site “with almost no impact to our online sales results,” Soltau said. “This marks a significant improvement to the business as it is today and paves the way for a return to growth in our digital channels in a sustainable and profitable way.”
She also said the company is “improving core store processes” for smoother and faster shopping. “In the first quarter, we launched a new checkout process to streamline tasks and enhance the customer experience which translates into a shorter wait time at checkout. We have tested our new centralized pickup and returns area, with plans to expand this concept to 500 stores during the second quarter. This not only makes the in-store experience better, but it’s a step toward a better omnichannel customer experience as well…We must reconnect with our customers on their terms with a deep understanding of how they live and shop with J.C. Penney.”
Last quarter, Penney’s officials stepped up meetings with suppliers. “Our partners came prepared with exciting new ideas. We are already underway with some of these new ideas and initiatives,” Soltau said.
“Enhancing our apparel areas will continue to be a key focus. It’s critical to our success moving forward.”
Soltau also said Penney’s is “taking a diligent approach to our home assortment” and that removing appliances enables the company to refine the soft home assortment.