Are J.C. Penney’s turnaround moves wise or foolish?
It’s not looking pretty for J.C. Penney.
The Plano, Texas, company said this week that it plans to close 33 under-performing stores around the country by early May and shave 2,000 jobs off its books. Chief Executive Myron Ullman called the move — designed to save the company $65 million a year — a key step in J.C. Penney’s “progress toward long-term profitable growth.”
Several analysts, however, say it’s a sign that the retailer’s turnaround may be more like a turndown.
“J.C. Penney’s rebirth is unfolding, but the huge issue is that it’s moving extremely slowly, causing inefficiencies at the store that diminish the promotional and marketing initiatives being undertaken by management to rebuild customer relationships,” Brian Sozzi, chief executive of Belus Capital Advisors, said in a note to clients.
Sozzi characterized the company as “a large, burning ship going full steam to reach dock before it sinks.”
On Thursday, J.C. Penney Co. shares slipped 11 cents, or 1.6%, to $6.90. In the last year the retailer’s stock has plunged more than 63%.
J.C. Penney has struggled to adjust to life after Ron Johnson, the Apple Inc. alumnus who became the retailer’s chief executive in November 2011. Not quite two years and many drastic changes later, he vacated his post, leaving behind a trail of dismal sales and disaffected shoppers.
Ullman, J.C. Penney’s chief executive before Johnson’s arrival, returned to his former post and began reverting the company to its pre-Johnson incarnation. Cycles of discounts returned, as did store brands such as St. John’s Bay.
And as of February and March, some 3,000 company sales associates in certain departments will go back to a commission pay system — an incentive for employees to help boost sales, the retailer said this week.
But in its hurry to lure shoppers back, J.C. Penney may be sacrificing profits by dangling bottom-barrel discounts all over its roughly 1,100 stores, analysts said.
The company is also overhauling its home section, an effort that Sozzi said has left some stores in upheaval, with gutted aisles and empty shelves in full view of customers.
Macquarie Capital Inc. analyst Liz Dunn issued a client note Thursday titled “You Can’t Penny Pinch to Prosperity.” In it, she chided the retailer for its failure to make a “meaningful improvement” in sales, arguing that earnings will struggle to return to positive territory otherwise.
“This is a small step for JCP,” Dunn wrote of the job slashing and store closures, including one in Rancho Cucamonga. “While the move is positive, it also highlights a lack of bigger initiatives to cut costs.”
J.C. Penney also is still embroiled in a legal fight with rival Macy’s over the right to sell home goods from Martha Stewart Living Omnimedia. Macy’s, which settled this month with Martha Stewart Living, claims that J.C. Penney violated domestic diva Stewart’s exclusive contract with Macy’s.
There’s also the issue of the holidays. Although J.C. Penney won’t announce official earnings until February, the company said last week that it is “pleased with its performance” during the key Christmas quarter.
But analyst Chuck Grom of Sterne Agee said the retailer’s short statement on the subject suggests that its numbers may not be as rosy it wants investors to think. Grom postulates that there may have been a decline in J.C. Penney’s December same-store sales, a key measurement that strips out volatility from opening and closing stores any 12-month period.
If so, J.C. Penney won’t be the only retailer with a less-than-spectacular holiday season. Retail sales in November and December rose 3.8% to $601.8 billion from a year earlier, narrowly missing expectations, the National Retail Federation said this week.
Moody’s Investor Service said holiday sales were “significantly lower” than it had forecast. Analysts pegged the tepid spending to heavy winter storms and “consumers remaining conservative and disciplined with their spending,” in part because of continued pressure from the payroll tax increase at the beginning of 2013.
On Thursday, Best Buy Co. said its holiday results suffered from heavy competition and deep discounting as revenue for the nine weeks ended Jan. 4 slumped 2.6% to $11.45 billion from the same period a year earlier. Best Buy shares tanked $10.74, or 28.6%, to $26.83 on Thursday.
The Minneapolis-based consumer electronics retailer, which had appeared to be breezing through its own turnaround, said its same-store sales dropped 0.9% in the U.S.
Sears Holdings Corp. said this month that its holiday quarter same store sales plunged 7.4% — a 5.7% dive at Kmart and a 9.2% decline at Sears. Macy’s Inc. said last week that while its holiday season was “successful,” it planned to lay off some 2,500 employees and close several stores in an effort to save $100 million a year.
As for J.C. Penney, the “holiday will probably turn out to be fine,” Moody’s analyst Margaret Taylor said.
“The turnaround is not happening as quickly as we hoped, but they had a very strong November, which gives them some cushion for a weaker December,” she said. “It’s not going to be a great quarter, but they haven’t said enough to indicate that it will be a terrible quarter either.”
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