NEW YORK, N.Y. – The legacy of J.C. Penney’s former CEO is being felt at the department-store chain.
Penney on Thursday reported that it widened its loss in the first quarter on a 16 per cent drop in revenue. It marks the fifth-straight quarter that the company has posted large declines.
The company’s stock fell 2 per cent in extended trading after the earnings report was published.
The results show that J.C. Penney Co. Inc. is still reeling from the turnaround plan orchestrated by its former CEO Ron Johnson, who was ousted last month after less than a year and a half on the job.
The plan included getting rid of coupons and most sales in favour of everyday low prices, bringing in hip brands like Joe Fresh and remaking outdated stores.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 favour sales and basic merchandise like loose-fitting khakis.
Penney last month rehired Johnson’s predecessor, Mike Ullman, who is adding back sales and bringing back basics. The company also announced last month that Goldman Sachs will provide $1.75 billion in financing, a move that eases worries that Penney could run out of cash this year.
But the Plano, Texas-based chain still faces big hurdles. Penney lost $348 million, or $1.58 per share, during the three months that ended on May 4. That compares with a loss of $163 million, or 75 cents per share, in the year-ago period. Revenue dropped 16.4 per cent to $2.63 billion.
Excluding charges related to restructuring and the management transition, Penney lost $289 million, or $1.31 per share, in the quarter.
Wall Street had expected an adjusted loss of $1.06 per share on revenue of $2.65 billion, according to research firm FactSet. Revenue at stores opened at least a year — one measure of a retailer’s health — fell 16.6 per cent. That was worse than the 15 per cent drop analysts predicted.
Penney blamed the revenue declines, which actually look better because they are being compared with big drops in the year-ago period, on old pricing and marketing strategies under Johnson. But the 1,100-store chain also said that construction to revamp its home departments in some stores also hurt sales. The home department is typically a key driver that attracts shoppers to the rest of the store.
The poor quarterly performance follows a year in which Penney lost almost a billion dollars and saw its revenue drop 25 per cent, or $4.3 billion, to $12.98 billion.
During a conference call with investors after the earnings report, Ullman cautioned that reconnecting with its customers is going to take time. The company started to add back sales on Mother’s Day and Ullman believes that by the back-to-school season, it will have restored some of the basic merchandise that was popular with shoppers but had been eliminated under Johnson’s tenure.
“The last year has been tough, but we are focusing on the future, and our teams are energized and ready to win,” Ullman said.
In particular, Ullman said that the company is bringing back certain private-label brands like St. John’s Bay in women’s that were shelved. Ullman said that St. John’s Bay was promoted heavily during his tenure but still had high profit margins.
The big question for Penney is whether it can get back the shoppers into stores. Analysts say one thing is clear: Penney can’t go back to its old ways. They say the company needs to strike a balance between catering to its loyal shoppers while bringing in younger customers.
During the seven years he was at Penney’s helm, Ullman tried to court younger shoppers by opening mini boutiques in stores that feature beauty company Sephora and exclusive names like European clothing brand MNG by Mango.
But overall, Ullman did little to change the stores, which have been criticized for being too dark and outdated. During Ullman’s tenure, sales declined from $18.18 billion in 2004 to $17.6 billion in 2010, his last full year at the company. Sales per square foot dropped to $155 from $177, according to Deborah Weinswig, an analyst at Citi Research
Johnson, the mastermind behind Apple Inc. stores, planned to shake up the company’s stodgy image when he took over the top job at Penney’s in November 2011. But he was counting on everyday low prices and youthful fashions from names like Betsey Johnson and Joe Fresh to get shoppers to visit more often. He also borrowed from Ullman’s strategy of opening mini-boutiques: He developed a plan to replace racks of clothing with shops-within-stores.
When Johnson announced his vision in January 2012, investor enthusiasm was high. But the honeymoon didn’t last long as sales fell. Penney’s shares have lost more than half their value since early last year and are now trading at about $18, down from $43 in February 2012.
Penney’s stock fell 41 cents to $18.38 per share in after-hours trading Thursday, after ending the regular trading session down 18 cents at $18.79.
Analysts say the problem wasn’t Johnson’s vision, but his execution. They say the big mistake was that Johnson didn’t test the changes with shoppers before rolling them out, as is common in retailing.
The big question is the future of the shops that Johnson began rolling out last fall. Johnson envisioned that the store would eventually be carved into 100 different mini boutiques. Ullman said Thursday that most of the budget this year for capital expenditures has been used for the home area. Ullman also told investors that he wasn’t going to come up with a specific number of shops to install and said he would test and build ones that customers clearly want.
Walter Loeb, a New York retail consultant, said he believes that the opening of Penney’s revamped home departments, which were under construction when Johnson left on April 8, will help attract customers. The areas will feature 20 new shops devoted to names like Michael Graves and Jonathan Adler. When the renovations are done, about 30 per cent of the store will be transformed.
“That is going to make the store more productive,” Loeb said.
Penney is hoping the revamp will help lure back some of the customers it lost, including Patricia Kellogg, 50. Kellogg, who lives in Nelson, Ohio, is a former Penney customer who has turned more to Macy’s since early last year when Penney cut back on discounts and got rid of some of her favourite brands.
“Penney was my main store, where I shopped for good quality things at a reasonable price,” said Kellogg, who works at a bar. “Now, you can’t find good quality stuff for the money.”
Kellogg stopped by a Penney store this week and bought winter scarves that were discounted to $1. “If they bring back better sales and better quality, I will be back,” she said.