J.C. Penney Co. (JCP:US) reported a third- quarter loss that was larger than analysts estimated as Chief Executive Officer Ron Johnson struggles to overhaul the fourth- largest U.S. department-store company. The shares fell.
The net loss of $123 million, or 56 cents a share, in the three months ended Oct. 27 compares with a loss of $143 million, or 67 cents, a year earlier, the Plano, Texas-based company said today in a statement. Excluding restructuring and management- transition costs, the loss was 93 cents a share. The average of analysts’ estimates compiled by Bloomberg was for a 7-cent loss.
Johnson, the former Apple Inc. (AAPL:US) retail chief who joined as CEO last year, has lost customers as he transforms most J.C. Penney stores into collections of branded shops and implements an everyday low pricing strategy. J.C. Penney is “a tale of two companies” with the old-style stores facing challenges as the new shops post higher sales per square foot, Johnson said today.
“There were some positive data points on shop performance but we are skeptical that these results can be replicated as the company moves deeper into the transformation,” Jeff Stein, an analyst at Northcoast Research in Cleveland, wrote in a note today, cutting his rating to sell from neutral. “Productivity gains in the 10 shops are largely in familiar brands that appeal to the legacy customer. It remains to be seen how the next 30 will perform as new brands are added,” he wrote.
J.C. Penney fell (JCP:US) 4.8 percent to $20.64 at the close in New York, the lowest closing price since Aug. 2. The shares have lost 41 percent this year, compared with gains at Macy’s Inc., Kohl’s Corp. (KSS:US) and Sears Holdings Corp. (SHLD:US)
Standard & Poor’s cut the company’s credit rating two levels to B-, six steps below investment-grade. The firm left J.C. Penney’s outlook as stable, saying that while its credit metrics may weaken in the next few quarters, its liquidity will remain adequate.
J.C. Penney’s 5.65 percent debt due in June 2020, among its most actively traded today, tumbled. The securities fell 3.4 cents to 90 cents on the dollar to yield 7.4 percent at 9:59 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The retailer’s third-quarter sales (JCP:US) fell 27 percent to $2.93 billion, trailing analysts’ average estimate of $3.27 billion. Revenue declined by more than 20 percent in the first and second quarters. Same-store sales fell 26 percent in the third quarter, more than the 15 percent decline estimated by analysts surveyed by researcher Retail Metrics Inc.
The company’s gross margin narrowed to 32.5 percent from 37.4 percent a year earlier, hurt by lower-than-expected sales in the quarter and an increase in clearance merchandise sales.
J.C. Penney incurred $34 million in restructuring and management transition charges in the quarter, according to the statement.
In September, Johnson took 300 analysts on a tour of the company’s 30,000-square-foot prototype in Texas to help communicate his vision for turning J.C. Penney into a “specialty department store.” He said at the time results at the company’s boutiques, installed in almost 700 of its stores, were beating comparable sales of other merchandise.
The retailer’s branded shops are proving to be more productive on a sales-per-square foot basis, Johnson said today on a conference call with analysts.
“If we can get a lift like that, you can imagine what will happen to the business as we move into the back half of next year, and that’s why we’re so excited about where we’re headed,” he said.
J.C. Penney has worked to win back shoppers through offers such as a $10 in-store coupon, 30 percent discounts off clearance items, free children’s haircuts and free family portraits. Traffic fell 12 percent in the quarter, which lacks a shopping event such as Valentine’s Day or Christmas, Johnson said.
“This is not a break in strategy,” Johnson said. “This is leveraging an asset base that we have built up for years, called a customer base to invite them back to the store. And I think a $10 gift is an act of generosity like a free haircut.”
The company will add suggested retail prices to its merchandise so customers can see how much they’re saving, and will match discounts on national brands such as Jockey when they are running sales, Johnson said. Discounted designer-wear chains such as Nordstrom Rack and T.J. Maxx typically display original retail prices at their stores.
The retailer was willing to let sales drop to establish a new base for the evolving J.C. Penney, which may be the “fastest-growing startup in retail history,” Johnson said.
J.C. Penney plans to end the year with about $1 billion of cash and has not drawn from its $1.5 billion line of credit, Chief Financial Officer Ken Hannah said today. The retailer is set to fund its transformation in the next 36 months, “without compromising that liquidity position,” he said.
“The results that J.C. Penney reported today are undeniably weak,” Brian Nagel, an analyst at Oppenheimer & Co., said today in a note. “JCP will require a lot of patience on the part of investors. This chain continues to head towards turnaround.”
Nagel rates the shares outperform, the equivalent of a buy.
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