J.C. Penney comeback goes off course on soft apparel sales

Dive Brief:

J.C. Penney shares fell as much as 8% Friday after the discount department store lowered its fiscal year same-store sales guidance from growth of 3% to 4% to between 1% and 2%.
J.C. Penney blamed increased competition from off-price retailers and weak traffic for a 0.8% decrease in third quarter same-store sales; Consensus Metrix analysts on average expected a Q3 same-store sales increase of 2.7%. Net sales fell 1.4% to $2.86 billion in Q3, missing the Thomson Reuters I/B/E/S average analyst estimate of $2.95 billion.
J.C. Penney swung to its 11th straight quarterly net loss in Q3, narrowing to $67 million, or 22 cents per share, from $115 million or 38 cents per share a year ago thanks to cost cutting. The company reported an adjusted earnings loss of 21 cents per share, meeting analyst expectations.

Dive Insight:

J.C. Penney looked to be making good on its turnaround efforts but hit a roadblock in Q3, with total and same-store sales going negative. The retailer’s ongoing effort to trim costs could be a tonic, according to Neil Saunders, CEO of retail research agency and consulting firm Conlumino.

“[W]e do not believe that it entirely blows the turnaround plan off course, not least because the company continues to reduce its losses and has a pathway to profitability,” Saunders wrote in an email to Retail Dive. “Moreover, the comparable sales slip is fairly modest when compared to rival stores and clearly shows that JCP is outpacing the rest of the department store market.”

It’s a good thing that Penney is diversifying its merchandise mix, adding appliance sales back after 33 years away from that category and boosting its home goods offerings, considering that apparel sales were a decidedly weak area, according to a statement Friday from CEO Marvin R. Ellison. Appliance sales will likely continue to benefit from rival Sears' downward spiral: Although appliances continue to be a strength for Sears, that retailer is closing stores and speedily losing market share.

"We are excited about the initiatives we have in place to drive incremental growth during the holiday season with our increased appliance penetration, new Sephora locations, free same-day pickup for online orders, a strong cadence of promotional events and our new lowest price guarantee,” Ellison said in a statement. “We are also thrilled about delivering a 200 basis point improvement in our private label credit card penetration in the third quarter, which led to our highest penetration in many years. These and other initiatives reinforce our confidence in our ability to achieve $1 billion in EBITDA for 2016."

Those Sephora cosmetics concessions, along with J.C. Penney's home, salon and fine jewelry categories, were the retailer's top performing divisions during the third quarter. “Along with the continued roll out of Sephora concessions, these category developments are positive inasmuch as they make JCP far less reliant on apparel,” Saunders said. “This offsets some of the vagaries and fluctuations of the fashion business and helps transform JCP into a proper department store destination which gives consumers many reasons to visit.”

But muted mall traffic could hurt during the holidays, Saunders noted, though he deemed Penney’s holiday marketing campaign a strength.

“As we head into the holiday quarter, we have a slight concern around mall traffic which could impact on JCP’s figures. This is largely something outside of the company’s control and we believe that it is a factor in this quarter’s weaker figures,” he said. “Because of this JPC will have to work hard to pull in customers, if not in store then online. Generally we are encouraged by the company’s holiday plans and believe that its ‘Joy Worth Giving’ campaign strikes the right note and features some good deals and interesting products.”