LOSSES NARROW FOR J.C. PENNEY
Byline: Evan Clark
NEW YORK — George W. Bush isn’t the only one hoping to project an upbeat message from Texas.
With J.C. Penney Co.’s adjusted fourth-quarter loss of 3 cents a share less severe than Wall Street’s expectations and company-wide changes under way, the word from Penney’s Plano, Tex., headquarters is: “The centralization, long overdue, has started.”
So said chairman and chief executive Allen Questrom, the veteran retailer installed in September to put the ailing department store chain back on track.
He also noted in a statement, “Although it will be two to five years before we fully restore the profitability of our business to competitive levels, I’m confident that incremental progress will continue to be made over the next several years.”
Including nonrecurring items, net loss for the quarter widened to $284 million, or $1.11 a share, from a loss of $12 million, or 8 cents, a year ago. Charges and nonrecurring items amounted to $435 million, or $1.08 a share, in the quarter.
Wall Street was looking for the firm to lose 5 cents a share for the quarter, so the 3-cent loss, exclusive of special items, was seen as a nominally good sign. The company’s stock fell 15 cents to close at $13.50 on the New York Stock Exchange Thursday.
A previously reported restructuring plan which will close 44 underperforming stores accounted for $285 million. Included in the charge is asset impairment, contract-termination costs and workforce reductions. Approximately 5,000 employees will be affected by the closures. Other noncomparable items include inventory markdowns on a change in assortments and the discontinuation of some merchandise.
Total revenues for the period ended Jan. 27 slid 0.8 percent to $9.75 million from $9.83 million a year ago.
Questrom said on a conference that “a very disappointing performance in both department stores and catalog” was somewhat offset by “enormous progress in clearing up inventory on both seasonal and discounted merchandise.”
“Free cash flow in 2000 exceeded our plan and we begin 2001 with approximately $1 billion in cash investments,” noted Questrom.
Penney’s is also reducing expenses and digesting a number of organizational changes, including management changes, which Questrom said has helped create a more professional workforce.
“A great deal of progress has been made in our understanding of who the J.C. Penney customer is,” mentioned the ceo, adding that the firm is also more aware of the competition for that customer.
The department store and catalog businesses posted an operating profit, on a LIFO (last in/first out) basis, of $24 million before the effect of $92 million of incremental markdowns from the narrowing of merchandise assortments. The LIFO charge for the quarter was $14 million compared to a $9 million credit in the year-ago quarter.
Gross margins, before the markdowns, declined to 24.3 percent, a product of increased promotional activity to clear seasonal merchandise.
Sales for the division decreased 3 percent to $5.97 billion from $6.15 billion in the 2000 quarter. Comparable-store sales in the department store channel decreased 1.6 percent while catalog sales decreased 5.8 percent from a year ago.
From a far smaller base, e-commerce sales, included in the catalog component, nearly doubled to $126 million from $64 million in the year-ago period.
Vanessa Castagna, executive vice president of Penney’s and president and chief operating officer for stores, catalog and Internet, said, for the past year, both sales and gross margin results were below the company’s expectations and that, despite some improvement in expenses, profitability suffered.
Inventory reduction goals were exceeded, though, as the company reduced inventory over $1 billion at retail for the year, half the year-ago level. Inventories in comparable department stores were 13 percent below year-ago levels.
Castagna said the top priority this year will be improving Penney’s merchandise offerings. Fashion assortments will be updated and focused, offering fashion colors with impact while continuing to narrow assortments, she said. In basics, key items and classifications will be the focus.
In marketing, she said, “Our challenge going forward is to make our advertising more effective by connecting our message to our merchandise offering.” There will be a move from event-driven marketing to “a more consistent promotional- driven environment.”
The marketing message will be consistent across all channels, she said, and “will give our customer a compelling reason to shop J.C. Penney and, as a result, drive traffic into our stores.”
She added, “The strategy emphasizes pre-print including improved quality, content and increased number of pages.”
To help sustain traffic, 130 of its stores in 2000 have been updated with wider aisles, improved lighting and new carpeting, creating “a strong visual presentation.” Approximately 100 more will be similarly updated this year. The customer will also be aided by assortment reductions, making stores less cluttered as well as improved customer service.
Joseph Grillo, an analyst with Deutsche Banc Alex.Brown, said in a research note that more consolidation of the retail locations, on top of the 44 already planned, could be in the future. “The latest closures are just the beginning in a series that is necessary to improve J.C. Penney’s same-store sales, sales per gross square foot, and operating performance,” said the analyst, who noted specifically that apparel sales have declined for the fourth consecutive year.
In response to analyst’s questions on the call about Penney’s plan to compete with the likes of Kohl’s and Sears, Castagna leaned on the turnaround plan’s central theme: “It begins and ends with merchandise. It’s all about what we can offer our customer.”
She said, “We can actually deliver to our customers what we’re promising, and that is a more compelling offering, with our private brands and our mix of national brands.”
She described the multi-channel aspect of Penney’s, with a retail, catalog and Internet presence, as “a differentiating factor” and said the bottom line is, “offering the customer value and fashion every day.”
George Strachan, a Goldman Sachs analyst, said of the company’s competitive stance, “The challenge will be to increase regular promotional intensity to match Kohl’s with a logistical backbone in place that guarantees delivery of the goods on a timely basis.
“We believe that only this can deliver Penney from its perpetual clearance spiral,” he said in a research note.
Grillo told WWD that Penney’s marketing shift could provide some difficulties. “They’ve been promoting for so long that it’s really become their m.o. and the consumer has come to expect that,” he said.
As the company tries to drive profitability and significantly cut inventory, he said, the top line could be affected.
“They’ve made some great first steps to catch a situation where they had excess inventory, but the jury’s still out and it’s still very early,” noted Grillo.
The company’s Eckerd Drugstore division reported revenues were up 2.7 percent for the quarter to $3.49 billion. Same-stores sales increased a strong 8.1 percent on a 14.4 percent increase in pharmacy sales. Front-end comps, though, declined 1.6 percent. Questrom on the call said that he still views this as a “a very, very strong growth business.”
For the year, the firm reported an adjusted net loss of $409 million, or $1.68 cents a share, compared to a gain of $336 million, or $1.16, a year ago.
Total revenue for fiscal 2001 inched up 0.4 percent to $32.65 billion from $32.51 billion in fiscal 2000.
Sales in the department stores and catalog division dropped 3 percent for the year to $18.4 billion against $18.96 billion last year.
For the first quarter, Penney’s expects to pull in earnings per share (EPS) in the 20 cent to 25 cent range ahead of Wall Street’s current consensus estimate of 19 cents.
In fiscal 2001, it expects EPS to be in the 70- to 80-cent range while the Street expects it to earn 64 cents.
Grillo said that the company’s earning estimates for the year “seem a little aggressive at this point.”
Strachan also said the firm’s stock faced difficulties from the current consumer and competitive retail environment as well as its “severe” capital constraints due to its many initiatives. He noted, however, the potentially huge upside margin potential from current low levels.
“We have confidence in management’s ability to deliver, but the clock is ticking and progress must come quickly on many fronts to sustain this franchise,” warned Strachan.