Dive Brief:

• J.C. Penney sales fell more than 10% year over year in the third quarter to about $2.4 billion. Comp sales fell 9.3%, or fell 6.6% excluding appliances, a category that Penney is exiting.
• The department store retailer slashed inventory by 9% and reduced its cost of goods sold by 3.5%. Driving the reduction of costs as a percentage of sales were margin improvements (both in-store and online), reduced shrink and the exit from appliance and furniture categories, the company said.
• Operating loss narrowed by 66%, to $34 million. The company also narrowed its net loss by more than a third, to $93 million. Comp and top-line sales missed the FactSet consensus while Penney's loss came in lower than estimated, sending the company's stock price up 12.7% in premarket trading, according to MarketWatch.

Dive Insight:

Along with reporting its Q3 results on Friday, Penney unveiled its "plan for renewal," which hinges on boosting customer traffic, centering merchandise around lifestyle, creating a compelling experience, cutting costs and building a "results-minded culture."

Along with its turnaround plan, Penney is touting its re-formatted store in Hurst, Texas, which the company specifically describes as "NOT a prototype or store of the future," but rather a "lab to inform actions as part of our broader strategy."

In an earlier press release, the company described the Hurst store as "a completely reimagined format" meant to "put the customer at the center of its business." The stores are merchandised around key categories and include things like tech-equipped styling rooms, a fitness studio, lifestyle workshops, a clubhouse for kids, a coffee shop and a selfie studio. On an analyst call Friday, Penney CEO Jill Soltau noted the company was adding higher-end brands to its offering as part of its 30-store partnership with ThredUp and the introduction of additional home brands including Brookstone and Sharper Image. She also said that many of the company's turnaround efforts require little or no new capital investments. 

The reduction of inventory and addition of new brands appear aimed at keeping Penney out of the endless cycle of discounting it has fallen into in the past. The stakes are high and odds long for Soltau and her team as they try to right Penney's troubled ship.

The company has more than $4 billion in long-term debt as of Q3 and pays hundreds of millions of dollars in interest expenses every year. That leaves the retailer with little time, capital and wriggle room to engineer a turnaround. The company does, however, have $1.7 billion in liquidity and is without a major debt maturity until 2023, when more than $2 billion comes due. 

The narrowed losses are good news, applauded by investors. But Q3 showed just how far Penney still has to go on its turnaround path. "While a few chinks of light are emerging in the story of JC Penney's revival, these are subsumed by the darkness of incredibly bad revenue numbers," GlobalData Retail Managing Director Neil Saunders said in emailed comments.

Saunders said his firm's research shows Penney's new store format could boost customer traffic, margins and sales volumes. But, he adds, "rolling out the format across the chain will be incredibly expensive" given how different the new concept is from its current stores. Moreover, Saunders notes, of the concepts that "in some existing locations the new format will fall flat," for the simple reason that much of Penney's business is tied to ailing malls.

"The current position of JC Penney is unfortunate. It finally seems to have a leader that understands retail and knows the direction the company needs to take," Saunders said. "However, the question is whether it has the resource[s] and energy to complete its journey."