J.C. Penney Co. Inc. on Tuesday posted a net loss of $151 million amid a comparable sales drop of 5.4 percent, heightening the sense of urgency surrounding the business and its prospects.
Despite the recent declines, Penney’s stock price rose 13 percent, or 16 cents, to $1.38 by the end of Tuesday, though the price is down more than 65 percent since January.
Reducing inventory, cutting shrinkage, cleaning up the web site, capitalizing on store closings by competitors particularly the now liquidated Bon-Ton Stores Inc. and Toys ‘R’ Us companies as well as closings by Sears and Kmart, and re-connecting with customers were among the priorities spelled out by Jill Soltau, Penney’s new chief executive officer, during her first conference with the company. Soltau joined Penney’s last month after serving as president and chief executive officer of JoAnn Stores, the nation’s largest fabric and crafts retailer, and earlier serving as president of Shopko Stores.
“We need to really understand where we can sit in this retail landscape,” said Soltau. “We know we have a place. We have millions and millions of customers who shop us every year.”
While acknowledging being overassorted but working hard to reduce inventories, Penney’s executives said their best merchandise performances and opportunities were in special sizes, baby apparel, toys, women’s apparel, active, jewelry, fragrance, skin care and private brands. Key to Penney’s survival is increasing revenues, particularly apparel.
Penney’s is looking to its Peyton & Parker private brand, launched last month, for a lift during the holiday season. Past private brand introductions by the retailer have generally been gender or category specific, but Peyton & Parker covers apparel, accessories and shoes for men, women and children. Family-oriented apparel offerings have been one of Penney’s better holiday businesses. Peyton & Parker also offers home products.
As would any new ceo, Soltau is reviewing Penney’s business, top to bottom. “We will be focusing our review on many areas, such as customer data and perception and how we communicate with our customer, including our promotional cadence, rebuilding our merchandising capabilities, execution both in-store and online, omnichannel strategies, our retail footprint, forecasting accuracy, strength results, and of course, inventory levels and replenishment capabilities,” Soltau said. “While this will be a lengthy process, I understand the need for quick action.…In the coming weeks and months, I will continue to meet with and learn from our teams throughout the entire organization, talking with them about what we’re doing that’s working well, and most importantly, what we can do to address our opportunities.”
Soltau said the company will adjust women’s apparel for “more profitable sales, which will add to the already improved results in that business. As we’re seeing more seasonally cool temperatures, we can also begin to leverage our strength in outerwear and sweaters for the holiday season.”
She also said the company is working to improve Penney’s web site experience, to make it “consistent” with the companies brick-and-mortar and mobile channels.
Toys, she said, is being pumped up 40 percent for the holiday season, as Penney’s sees a market share opportunity in light of g the liquidation of Toys ‘R’ Us.
Jewelry, said Soltau, “continues to perform well for us. So we will leverage event-driven sales during the holiday as well as expanding some key bestsellers throughout the chain. And of course, offering some excellent gifts and deals on Black Friday.”
“As I walk our stores, we are overassorted and heavy on inventory,” Soltau acknowledged. “In an effort to improve the experience and assortments we made the decision to initiate an inventory liquidation to clear excess levels of slow-moving basic inventory. We have made solid progress on this initiative as evidenced by our inventory position at the end of the quarter.” Inventory at the end of the third quarter was approximately $3.2 billion, down $183 million or 5.4 percent versus last year. the company expects inventory to be down at least 6 percent at year-end.
“The rightsizing of our inventory eliminates certain tasks associated with high levels of inventory and slow-moving products, which allows our great store associates to better focus on providing the excellent customer service J.C. Penney has traditionally been known for. All that said, we believe we can deliver profitable growth in the future by strengthening our retail fundamentals and better managing our inventory.”
Gross margin last quarter decreased 210 basis points, due to the liquidations.
On the positive side, Penney’s ended the quarter with liquidity in excess of $1.9 billion. Jewelry, women’s apparel, men’s and soft home were the best performing categories. Specifically in women’s, dresses, active, Penney’s own Liz Claiborne and Worthington brands, juniors, outerwear and cold-weather accessories were the best-performing areas. Men’s big and tall, particularly the new Shaquille O’Neal XLGTM label, and seasonal merchandise also performed well.
Going forward, sales and margins will continue to be under pressure, but Penney’s expects there be less margin pressure in the fourth quarter than there was last quarter.
According to Trent Kruse, senior vice president of finance, “We have very manageable near-term debt maturities with $50 million of unsecured debt maturing in October of 2019 and $110 million of unsecured debt maturing in 2020.…We have a very manageable runway from a maturity schedule perspective. Do we still feel we have a little too much, yes.”
Penney’s withdrew its previous 2018 earnings guidance. The company expects comparable sales for the year to be down low-single-digits but coming in slightly better than the third quarter.
Over the last few years, Penney’s has closed roughly 20 percent of its stores, including about 140 last year. Stores in the same markets as the former Bon-Tons outpaced the balance of the Penney’s chain. “We’re in the process of reviewing the store fleet as we do on an ongoing basis,” said Kruse.