Bloomberg News

J.C. Penney Lowest Sales in Decades Show Johnson Stumbles

February 28, 2013

J.C. Penney Posts Wider Net Loss as Johnson Turnaround Stumbles

Sales in the fourth quarter, which includes the holiday shopping period, slid 28 percent to $3.88 billion. Photographer: Victor J. Blue/Bloomberg

J.C. Penney Co. (JCP:US) slid after the department-store chain lost $4.3 billion in sales in the first year of Chief Executive Officer Ron Johnson’s turnaround plan.

The shares fell 17 percent to $17.57 at the close in New York, the worst performer in the Standard & Poor’s 500 Index. J.C. Penney yesterday said its net loss in the quarter ended Feb. 2 widened to $552 million from $87 million a year earlier. The Plano, Texas-based retailer’s annual revenue slid (JCP:US) 25 percent to $13 billion, the lowest since at least 1987.

Johnson, the former Apple Inc. (AAPL:US) retail chief who joined as CEO in November 2011, has gone back on his everyday low pricing strategy by adding sales, promotions and new price displays in recent months. While Johnson yesterday reiterated a plan to install 100 boutiques inside most J.C. Penney stores, he also said he had “made some big mistakes.” The retailer’s sales now trail Gap Inc. (GPS:US) and shrank to less than half those at Macy’s Inc. (M:US)

“The conference call was surreal -- I would have been too mortified to appear in public,” Bernie Sosnick, an analyst at Gilford Securities in Melville, New York, with a sell rating on the stock, said in a telephone interview. “You’re getting down to a point where Penney cannot absorb many more significant losses without the damage becoming irreparable.”

S&P cut its credit rating on the company to CCC+, the lowest tier of junk today, from B-, citing further operational disruptions in the next few quarters and “less than adequate” liquidity. J.C. Penney will need to find additional financing or borrow “substantially” on its revolving credit line to fund the transformation, the ratings company said.

Ackman’s Recruit

J.C. Penney fell as much as 22 percent earlier today, the the biggest intraday drop since at least 1980, according to data compiled by Bloomberg.

J.C. Penney’s stock lost 44 percent last year. Through the close of regular trading yesterday, the shares declined (JCP:US) 30 percent since June 13, 2011, the day before Johnson was announced as J.C. Penney’s next CEO. The Standard & Poor’s 500 Retailing Index has rallied 42 percent in that time.

Johnson, a former Target Corp. (TGT:US) executive, helped Apple co- founder Steve Jobs create the iPod-maker’s retail stores, which are unrivaled in sales per square foot. At 52, he was recruited to J.C. Penney by activist investor Bill Ackman, who’s on the retailer’s board (JCP:US). Ackman’s Pershing Square Capital Management LP is the company’s largest investor, with (JCP:US) 18 percent of shares outstanding.

Four Years

Johnson has said his transformation of the company, presented to investors in January 2012, would take four years.

Revenue in J.C. Penney’s fiscal fourth quarter, which includes the holiday shopping period, slid 28 percent to $3.88 billion as sales at stores open at least a year fell 32 percent. Analysts estimated revenue of $4.08 billion, on average.

On an earnings call with analysts yesterday, Johnson said he wants to “stay out of the guidance business” and focus on the long term, declining to give details on sales in the current quarter. He said the company will have a better chance of returning to growth once it finishes upgrading more stores.

“Our commitment is to return to growth,” Johnson said. “The sooner we do that the better, but we’re here for the long haul, and we believe we’re taking the steps needed to return to growth, and we’ll report that to you as soon as that happens.”

Understanding Value

Johnson, who seeks to turn the retailer into “America’s favorite store,” is using new displays showing suggested prices to help customers understand the value of merchandise, adding promotions and resuming some sales around events and holidays such as back-to-school and Valentine’s Day. He’s sending customers more e-mails and worked to regain shoppers with offers such as $10 in-store coupons and 30 percent discounts off clearance items. He also has switched up his marketing team.

“They’re essentially changing the premise they started with a year ago” by adding promotions, Erika Maschmeyer, an analyst at Robert W. Baird & Co. in Chicago with a neutral rating on the stock, said in a telephone interview. “They needed that catalyst to drive initial traffic. They are getting closer to that. It’ll be interesting to see whether it’s enough.”

This spring, the company is improving its home-goods department and introducing clothing from Joe Fresh, Marchesa’s Georgina Chapman, and William Rast, a line founded by Justin Timberlake and childhood friend Trace Ayala. It will add close to 20 shops, J.C. Penney said yesterday.

Levi Boutique

J.C. Penney’s shop-in-shops, installed in fewer than 700 of the retailer’s 1,100 stores, are part of an effort to turn the company into what Johnson has called a “specialty department store.” Last year he said the shops, including boutiques for Levi Strauss & Co. and Izod products, are producing higher sales per square foot.

Johnson gave a few hints about first-quarter performance, saying that Joe Fresh has been the top-performing brand online this week, beating out Liz Claiborne. He also said traffic during the President’s Day holiday weekend was unchanged from last year and higher on Valentine’s Day.

The retailer said it had $930 million in cash (JCP:US) and cash equivalents at the end of the fiscal year, down from $1.51 billion a year earlier and trailing a forecast it gave a few months ago. Chief Financial Officer Ken Hannah in November said the company would end the fiscal year with about $1 billion of cash and that the chain could fund its transformation in the next 36 months without compromising its liquidity.

Adjusted Cash

Hannah yesterday said the company, with adjusted cash on hand of $850 million, has access to $3 billion in short-term capital (JCP:US). He reiterated the company’s plan to self-fund its transformation through cash from operations.

J.C. Penney bonds fell to a record low after the earnings report. The retailer’s credit rating has been slashed deeper into junk territory since Johnson took over.

The retailer’s $400 million of 5.65 percent securities due June 2020 dropped 3.75 cents to 79.75 cents on the dollar to yield 9.59 percent at 8:54 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt traded at 80.75 cents with a 9.4 percent yield at 3:46 p.m.

Second Cheapest

J.C. Penney now trades at around 0.3 times sales, the second-cheapest among U.S. department-store companies with a market capitalization of more than $1 billion, according to data compiled by Bloomberg. Macy’s has a multiple of around 0.6 times, while Gap is valued at about 1 time sales, the data show.

“There’s really nothing that we’ve seen like it,” Baird’s Maschmeyer said of J.C. Penney’s sales decline. “They don’t give much in the way of guidance, which makes it really hard to figure out how to think about this one for 2013, what is the base, and how well are these new promotions working.”

The company said lump-sum settlements from its primary pension plan resulted in a charge of 41 cents a share in the fourth quarter while restructuring and management-transition charges were 8 cents a share. J.C. Penney also sold more items on clearance while selling fewer items in total, shrinking gross margin to 23.8 percent from 30.2 percent a year earlier. The net loss for the year was $985 million, or $4.49 a share.

Macy’s and Stage Stores Inc. said they have seen some sales improvement because of the retailer’s woes. Sears Holdings Corp. is headed toward six straight quarters of same-store sale increases for apparel while Wal-Mart Stores Inc. in the fourth quarter posted its first such gain in clothing in seven years.

Helped Macy’s

J.C. Penney’s decline “obviously helped us in 2012, but remember, the overlap between customers isn’t 100 percent,” Macy’s Chief Financial Officer Karen Hoguet said on a Feb. 26 earnings call. “There’s a lot of our customers that are well above shopping at Penney’s.”

Many brands in J.C. Penney that aren’t getting the full shop treatment are concerned because they’re losing volume as sales drop, said Ron Friedman, head of retail and consumer products at accounting firm Marcum LLP, which works with some suppliers to the company.

Steven Madden Ltd. CEO Edward Rosenfeld said on a conference call this week that the company’s business at J.C. Penney has been “tough,” with its Olsenboye line dropping 10 percent in 2012 from 2011. VF Corp. said earlier this month the company is in “active discussions” with J.C. Penney about what a Vans or Lee boutique may look like.

Last month, PVH Corp. CEO Manny Chirico, whose company makes the Izod brand at the department-store chain, said those boutiques have been a “grand slam home run.”

Bearish wagers account for a record 26 percent of J.C. Penney’s shares outstanding, making the company the fourth most- shorted stock (JCP:US) in the Standard & Poor’s 500 Index, according to data compiled by London-based research firm Markit and Bloomberg. In a short sale, an investor borrows stock and then sells the shares in anticipation of returning them at a lower price in the future.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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    (JC Penney Co Inc)
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