J.C. Penney Co. will be aggressively pushing its home business this year, but apparel isn’t being overlooked.
On Friday, Penney’s reported that its fourth-quarter net income rose to $254 million from $192 million a year ago with some positive selling trends and margin gains contributing to the bottom line. Yet, Penney’s chairman and chief executive officer Marvin Ellison acknowledged that women’s, men’s and kids’ wear underperformed, while the home business, jewelry, footwear, handbags, salon and Sephora shined.
“While we’re encouraged by overall progress we’re making as a company, we’re fully aware that our work is not complete,” Ellison said about apparel, during a conference call.
Women’s has been a multiyear repair project for Penney’s, with activewear, dresses, contemporary and casual sportswear seeing the most updating recently, as the store pulls back on its historic emphasis on traditional styling and career looks. The 875-unit Penney’s is getting quicker delivering new floor sets; activewear is getting beefed up particularly with Adidas and Nike presentations. The Adidas assortment will be expanded to more doors and receive “meaningfully upgrades” of store presentations, and Puma, Champion and Copper Fit are getting added. “We’re playing catch-up,” Ellison said, referring to activewear. Special sizes in women’s, men’s and kids across all categories are also getting a lot of attention.
For women’s overall, “We expect to see a positive comp in women’s in the first quarter,” Ellison said. “We are excited about all the new sets and the performance of those sets. We have the full spring set for the chain happening within the next week or so. So we have every expectation that in Q1 we will see the women’s apparel business turn positive, and we also have the same expectation for the kids’ apparel business.” He said the forecast is based on pilots, tests, customer surveys, focus groups and “the great response that we have been able to measure and see from the things that we did in the latter part of the fourth quarter.”
He sees Penney’s gaining ground over other retailers in apparel. “There is over a $9 billion category overlap in the malls that we occupy with retailers that are in distress, and we see that as an opportunity to get a greater share of that. The consumers are not going to stop shopping just because stores close, and we have quite a few malls that are reasonably capitalized, meaning that if an anchor closes, they have the wherewithal to redevelop that space.” Fifty or fewer malls will not have the ability to capitalize, Ellison noted.
Still, Penney’s is more bullish on the home front. “We’ve identified over 300 malls, where we will aggressively pursue this unprecedented sales opportunity in 2018,” Ellison said. “We’ve developed a merchandising assortment, which includes appliances, mattress, furniture, simple home installs and workwear that will generate market share gains as struggling mall competitors continue to close. With billions of dollars of potential market share up for grabs in the near future, our strategy will be surgical yet aggressive, and we will not sit on the sidelines and allow all of these sales dollars to go to other retailers.” Appliances, mattresses and furniture were all cited for generating high double-digit sales gains last quarter.
Sephora continues to be a hit at Penney’s. Plans call for opening approximately 30 Sephora shops inside Penney’s this year, which will bring the total to approximately 670 Sephora shops.
For overall sales, Penney’s is not very bullish on 2018. Total net sales are projected to be approximately 430 basis points lower than comp sales in fiscal 2018, which are expected to be flat to up 2 percent. Total sales are impacted by 141 stores closing last year, mostly late in the second quarter. For fiscal 2018, about seven stores will close, mostly in the second quarter. Adjusted earnings per share are expected to be in the range of $0.05 to $0.25 per share.
The outlook apparently discouraged investors. By midday, Penney’s stock was down 3 percent, or 12 cents, to $3.80.
Last quarter, Penney’s net was lifted by a big tax benefit, positive sales trends and expense controls. However, adjusted net income fell to $179 million, or 57 cents per share, from $202 million, or 64 cents per share, including a gain of $62 million, or 20 cents per share from the sale of the home office.
Comparable sales rose 2.6 percent and were recorded on the same 13-week basis as a year ago. Total sales for the fourth quarter ended Feb. 3, 2018 increased 1.8 percent to $4.03 billion compared with $3.96 billion in the year-ago period. The most-recent fourth quarter had 14 weeks versus 13 weeks a year ago.
For the year, Penney’s had a net loss of $116 million, or $0.37 per share, compared to net income of $1 million, or $0.00 per share last year. The loss was primarily due to restructuring charges associated with store closures and voluntary early retirements.
Adjusted net income increased $44 million to $68 million, or $0.22 per share, compared to adjusted net income of $24 million, or $0.08 per share, last year.
Total net sales decreased 0.3 percent to $12.51 billion; comparable sales increased 0.1 percent. The slight decline in sales was primarily attributed to the store closings.
The company said it was eliminating 360 positions including 130 at the home office. Others were at the regional, district and store support levels. The annual cost savings generated from the cuts were estimated at $20 million to $25 million.
“As the company continues to make progress on its strategic framework and implement new processes and organizational efficiencies, it is imperative that we maintain a thoughtful approach to managing expenses, while effectively supporting the needs of the business,” added Ellison. “These decisions are always difficult but necessary to speed up decision-making and make us a more efficient company. As we bring increased value to our customers, maintaining a culture of intense expense reduction is essential.”
In some high-level executive changes, Penney’s named Joe McFarland executive vice president and chief customer officer, responsible for merchandising and store operations. Also Jodie Johnson was promoted to head of merchandising for women’s, beauty and family footwear, and James Starke has been promoted to head of merchandising for men’s, children’s, home and jewelry, reporting to McFarland. Additionally, Therace Risch has become chief information officer and chief digital officer. As a result of this appointment, Mike Amend will be leaving the company.