J.C. Penney expects heavier Q3 loss as it recasts women's apparel

Dive Brief:

J.C. Penney cut its outlook for the third quarter as the department store moved to clear inventory, via discounting, in its women’s apparel sections, the company said Friday in a press release. Penney now expects a Q3 loss of 40 cents to 45 cents per share, more than double previous estimates, as well as an increase in comparable store sales of between 0.6% and 0.8%.
CEO Marvin Ellison said in a statement that the retailer decided, after seeing positive initial results, to accelerate "a wider transformation of the entire women's department by clearing slow-moving inventory, primarily in women's and other apparel categories." That strategy largely entails expanding the casual and contemporary offerings in the retailer's women’s apparel sections. This "comprehensive reset" improved the performance in the women’s division and of the company overall, Ellison said.
For the fiscal year, Penney now expects earnings of 2 cents to 8 cents per share and for comparable store sales to remain flat or drop by as much as 1%. The company estimates costs of goods sold to increase 100 to 120 basis points, compared to 2016, and general corporate expenses to decrease 1% to 2%.

Dive Insight:

Shareholders drubbed Penney’s stock on Friday morning, knocking it down by more than 20% on its new Q3 outlook. (In fact, they punished the entire department store sector, according to Seeking Alpha stock tracking.) But the retailer said the moves were necessary to carry out its turnaround efforts in women’s apparel, a tough sector for all players at the moment, and that the efforts produced results.

Ellison said in his statement that the liquidation in women’s inventory boosted sales in September and October, but even without that benefit the company expected low single-digit comparable sales growth during that time.

As for the hit on earnings, Ellison said, "Although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the company as we transition into the fourth quarter and fiscal 2018," he said.

Ellison added that Penney was making efforts to centralize pricing and planning teams under the company’s new chief financial officer so as to streamline its pricing, promotion and markdown strategies. Those moves, in turn, are meant to improve the retailer's predictive analytics to help management make quicker, more focused discounting and inventory decisions, Ellison said. To free up money to invest in new and trending merchandise categories, J.C. Penney liquidated inventory across all its apparel divisions.

Some analysts have been clamoring for the department chain to move quicker in its apparel turnaround. Neil Saunders, managing director of GlobalData, said in comments emailed to Retail Dive after the company's second quarter earnings release, "While we maintain the company is moving in the right direction, the lack of progress on profit and same-store sales both highlight that the turnaround program is a long-term endeavor that will take some time to deliver." In particular, Saunders pointed to the "much further work" Penney needed to do to improve retail sales, where womenswear especially remained "lackluster" in a flooded market often full of discounted merchandise.

In the long-run, J.C. Penney and its peers face steep existential challenges. Mass merchants have been cutting into their share for years. Amazon and other online players have been stealing apparel sales. And off-price sellers have been growing like gangbusters, as customers seek out steep discounts and "treasure hunt" thrills. That growth has and will likely continue to come at the cost of department store sales.