J.C. Penney Co. Inc. today reported lower losses for the third quarter, but its shares fell as it maintained its forecast.
Penney’s said net losses for the third quarter ended Oct. 31 fell to $137 million from $188 million, equivalent to a loss per share of 47 cents, besting Wall Street estimates by 8 cents. Revenues for the quarter were $2 billion, which were 5 percent, or $20 million, above the 2014 third quarter. The Plano, Tex.based-retailer posted net sales of $2.9 billion compared with $2.7 billion in the third quarter of last year. Same-store sales increased 6.4 percent for the period.
“We grew the top line and intensified our expense discipline,” said Penney’s chief executive officer Marvin Ellison. “As we look to the fourth quarter, we’re well positioned to compete effectively during the key holiday shopping period.”
In a conference call with Wall Street analysts, Ellison outlined Penney’s strategy to regain its luster, which hasn’t been seen since the Eighties, including increasing inventory going into the crucial holiday period. “We know we left sales on the table last year during back-to-school and holiday,” Ellison said. “We were severely broken. There’s the risk that investing in inventory one season will turn into markdowns the next season.” Ellison said the dollars will be spent on dot.com, basics, athletic apparel and handbags and accessories, which are all seeing growth.
Wall Street was unconvinced as Penney’s stock in morning trading declined 93 cents, or 10.64 percent, to $7.86 on the New York Stock Exchange.
Admitting that Penney’s has more work to do, Ellison said the company’s priorities include leveraging its sourcing network and more than 200 in-house designers to create private brands and increasing profits by not relying on third-party middlemen.
Penney’s has to catch up in the online world, he said, adding that “online performance improved sequentially over the second quarter. We increased our sku’s, increased our site’s speed by 30 percent and increased product reviews by 40 percent. We’re going to continue to push forward.”
While the number of Penney’s engaged customers has remained the same as 2011, the retailer is working to increase the frequency of their visits and total spend.
Sephora is attracting new and younger customers and its rollout will be accelerated. InStyle hair salons, a partnership between the retailer and magazine, is in 800 stores and “is bringing needed energy and excitement to that business,” Ellison said.
However, Penney’s lost two high-profile in-store shop concepts. Spanish retail giant Mango on Wednesday said it will close all 450 MNG by Mango shops-in-shop in J.C. Penney stores by February. Joe Fresh, a Canadian label, shuttered its shops-in-shop at Penney’s earlier this year.
That may be why Penney’s is focused on building its private brands.
“We have an opportunity for continued margin expansion by leveraging our private brands,” Ellison said. “As we grow our private brand penetration, we’ll differentiate ourselves from the competition.”
Penney’s is redesigning the center core shopping area in more than a third of its stores, bringing fashion, jewelry, handbags and accessories adjacent to Sephora. “These investments in center core will be in addition to the updates in footwear we made this year.” The retailer removed men’s shoes from the department, enlarging the women’s area by 30 percent. “It’s exceeded our expectations,” Ellison said.
Gross margin improved by 70 basis points on top of a 710 basis point improvement in last year’s third quarter, to 37.3 percent of sales. SG&A expenses were down $41 million to $948 million, or 32.7 percent of sales, representing a 300 basis-point improvement over the 2014 third quarter. Earnings before interest, taxes, depreciation and amortization improved to $107 million in the period. On an adjusted basis, EBITDA improved to $108 million, even taking into account Penney’s recent settlement of a class-action lawsuit over alleged advertising claims.
For the full year, the company expects comps to increase 4 to 5 percent.
“Our performance year-to-date gives us confidence that our strategy will fuel growth to deliver $1.2 billion EBITDA in 2017,” Ellison said.