Penney's 2Q results show some signs of life
NEW YORK • The worst may be over at J.C. Penney Co.
The beleaguered department store chain on Tuesday reported its sixth straight quarter of big losses and steep revenue drops as it continued to face challenges related to a botched turnaround plan spearheaded by its ousted CEO Ron Johnson.
But investors sent Penney shares up six percent to nearly $14 after having pushed the stock down nearly 70 percent in the last 18 months in an expression of confidence that returning CEO Mike Ullman has started to stabilize the business.
Since he retook the top job in April after having occupied it from 2004 to 2011, Ullman has been bringing back coupons, frequent sales events and basic merchandise like khakis and jeans that Johnson eliminated in a failed attempt to attract hipper, more affluent shoppers.
The latest report offered some encouraging signs that the move is beginning to pay off: Revenue improved from month-to-month during the quarter, and the decline in Penney's online business slowed significantly in part due to the company's move to veer from Johnson's strategy and go back to operating its online businesses with its physical stores. The chain also said it is seeing encouraging start to the back-to-school season, the second largest selling period behind the winter holidays.
Bernard Sosnick, a retail analyst at Gilford Securities, said based on the results, he expects Penney to get back to profitability by the fourth quarter. He also said he wouldn't be surprised if during the first half of next year, the chain posted sales increases of 10 percent to 15 percent.
"There is light at the end of the tunnel," Sosnick said. Paul Swinand, a retail analyst at Morning Star, agreed, saying Penney "is showing some signs that it's turning the corner."
Penny's Ullman, however, took a more cautiously optimistic tone in his call with investors on Tuesday morning. He wouldn't promise that Penney would see a revenue gain in the current quarter, noting that August, the first month of the third quarter, will be difficult since business is being compared with a year ago when Penney drove customers in with free haircuts.
He also cited a challenging economic environment that has tripped up a string of retailers, including Wal-Mart Stores Inc. and Macy's Inc., in the latest quarter. Both last week released bleaker outlooks for the year.
"As you can see in our results for the quarter, we aren't where we need to be yet," he said. "This is, however, a journey. There are no quick fixes to correct the errors of the past. It is going to take time to get fully back on the right track across the company."
Indeed, Penney has a lot of work left to do. In the three-month period that ended Aug. 3, Penney lost $586 million, or $2.66 per share. That compares with a loss of $147 million, or 67 cents per share, a year earlier. Revenue was $2.66 billion, down 11.9 percent from $3.02 billion. Analysts were expecting a $1.07-per-share loss on revenue of $2.77 billion.
Revenue at stores open at least a year, an indicator of a retailer's health, also dropped 11.9 percent, worse than the 8.3 percent analyst expected. That was on top of a 21.7 percent drop a year ago. However, the sales drop in the latest quarter is smaller than the 16.6 percent decline in the first quarter.
The quarter was hurt by Penney's move to clear out some of the merchandise from the Johnson regime to make room for new assortments in basics like khakis. But the newly launched home business, a project of Johnson's that was supposed to bring shoppers back to the store, turned out to be a big disaster too. One of the big reasons: the merchandise was too trendy and pricey for the Penney customer.
Still, Penney has some brighter spots. Online sales were $215 million for the quarter, down just 2.2 percent from the year ago period. That marked a dramatic improvement from the first quarter when online sales dropped about 30 percent.
Penney's results came a week after its largest shareholder, William Ackman, resigned from the company's board of directors as part of a deal to resolve an unusually public battle between the activist investor and the department store chain. Ackman's Pershing Square Capital Management has a 17.7 percent stake, or 39 million shares, in Penney.
Ackman went public two weeks ago with statements saying he'd lost confidence in Penney's board and that Chairman Thomas Engibous should be replaced. Ackman and the retailer's board also were bickering over how quickly the company should replace Ullman. Penney's board reiterated its support for Ullman on the same day Ackman resigned.
Ackman, who joined Penney's board in February 2011, was the one who pushed the board to hire Johnson, a mastermind of Apple Inc.'s successful stores. The hope was Johnson could inject new energy into a tired company.
Johnson's plan included getting rid of coupons and eliminating most discounts in favor of everyday low prices, as well as bringing in hip brands like Joe Fresh and remaking outdated stores. But the changes that were meant to attract younger, wealthier shoppers, wound up turning off its loyal middle-income, middle-age customers who favor sales events and basic merchandise.
As a result, Penney amassed nearly a billion dollars in losses and its revenue dropped 25 percent for the fiscal year that ended Feb. 2 in the first year of the turnaround strategy. Sales declines and losses continued into the first quarter as Johnson's legacy cast a shadow on the results.
Under Ullman's leadership, Penney is bringing back store label brands like St. John's Bay that were eliminated by Johnson. The company also is working to restage the home departments in the 500 stores where new designers like Jonathan Adler and Michael Graves were added.
Ullman said that early feedback from customers made it clear that they want a more balanced assortment of trendy and traditional merchandise. Ullman also said that Penney will be rebuilding areas for luggage, frames and window coverings, which were cut back under Johnson.
Besides worries about the company's merchandising strategy, a big concern has been that Penney does not have enough cash on hand to fund its turnaround. But on Tuesday, Penney reiterated that it ended the quarter with $1.53 billion in cash.
While some analysts said liquidity remains a concern, Sosnick, the Gilford Securities analyst, believes that Penney has the cash needed to get through an extended turnaround.
"The episode from hell is over, and Penney has deeper problems than ever before but we believe it still retains the goodwill of its core shoppers and that they will return and shop more frequently as assortments of traditional lines are rebuilt," he said.
Penney shares rose nearly 6 percent, or 77 cents, to $13.99 in early afternoon trading. Before Tuesday, shares have been down nearly 70 percent in value since February 2012 when investors pushed up shares to $43 on optimism over Johnson's plan.
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