Dive Brief:

• J.C. Penney on Thursday reported first quarter net sales of $2.58 billion, a 4.3% drop from the year-ago period, and total revenue of $2.67 billion, according to a press release. Comparable store sales rose modestly by 0.2%, an improvement over last year's 3.5% decline. For the quarter, the department store retailer posted a net loss of $78 million, less than half of last year's Q1 loss of $187 million.
• Across the board, Penney's numbers fell short of analyst estimates. Revenue came in $60 million under the FactSet consensus, cited by MarketWatch, comps were nearly 2% short of the consensus and the company's loss was 2 cents per share higher than the consensus. Penney's shares fell 8.8% in premarket trading. 
• Penney CEO Marvin Ellison said in a statement Thursday that cooler-than-normal temperatures in April were a drag on the company's sales in Q1. For the year, executives held their guidance for comparable sales, which they expect to be flat or increase up to 2%, but dropped estimates for earnings by more than 10 cents per share, to between a 7 cent loss per share to a 13 cent profit.

Dive Insight:

Penney in Q1 was, in part, dogged by a problem that just won't go away: discounting.

Last fall, in the third quarter, the retailer made a strategic decision to clear much of its women's apparel inventory and other products in an effort to reset it ahead of the holidays. The resulting profit drops sent investors fleeing and prompted S&P Global to issue a negative outlook for the retailer.

This year, weather forced Penney to discount inventory that became irrelevant in an abnormal spring. But the company is also playing catch up, as it chases the women's activewear market. That category, executives said on a conference call Thursday, grew in the double digits — growth due in part to the Q3 revamp of women's apparel.

It's worth nothing that other apparel sellers, including Macy's, have posted strong performances during the same period. Managing Director of GlobalData Retail Neil Saunders said in comments emailed to Retail Dive that the Penney's sluggish Q1 "has more to do with the poor assortment at JCP than the vagaries of the weather." 

The problem for Penney is bigger than just one bad season. Ellison said on the call that the department store chain is facing the most "challenging and competitive retail market we've seen in 50 years." And the company is pinning its hopes for the year on apparel, which Ellison described as "key to the second quarter and the balance of the year." He pointed out that, after weather hiccups this spring, management was "pleased" with apparel's performance in the last week of April and going into May.

While apparel might be a "lynchpin," as Ellison described it, in Penney's strategy, the retailer is also making moves to expand its category offerings to customers, in part by targeting market share left on the table from ailing and failing retailers.

The CEO has made no secret that its expanded assortment in the home category — including appliances, mattresses and workwear — is a direct play for former Sears customers in places where the struggling rival has closed stores. Specifically, Sears has closed stores in 100 malls it shares with Penney, Ellison said. Thanks to Sears' "donated" market share, Penney's comps in appliances grew 15% in Q1.

On the whole, Ellison described the "net effect" of Sears' store liquidations — which typically dump discounted merchandise onto the market — as positive. Meanwhile, Penney has seen little noticeable effect from the liquidation of Bon-Ton stores in the 97 malls it shares with Penney, Ellison said. (That is partly because the Bon-Ton stores didn't carry much inventory of late, he noted.)

The retailer, like several others in the wake of Toys R Us' collapse, is also chasing the toy market, having found that customers frequently searched for toys on its site. Penney has also benefited from a strong performance in beauty, helped largely by its partnership with Sephora.

But GlobalData's Saunders noted that the company is barely profitable at the operating level. "What it needs to do is develop more compelling own-brands in all categories and curate these in a way that is meaningful to its target customer," he said. "This would strengthen the whole business and would encourage shopping across departments."