UPDATE: J.C. Penney closing 138 stores, liquidations begin next month

Dive Brief:

UPDATE: Nearly a month after announcing plans to close underperforming stores across the U.S., J.C. Penney on Friday identified the 138 locations in question, including nine stores in Texas and eight in Minnesota, with liquidations beginning April 17. The retailer also will shut down two distribution facilities and offer buyouts to 5,000 workers over the next few months.
The closures represent an effort to trim costs, leverage lucrative real estate value from a Buena Park, CA supply chain facility and better position the discount department store “to effectively compete against the growing threat of online retailers,” J.C. Penney CEO Marvin Ellison said in a statement last month.
The stores in the crosshairs represent about 14 % of J.C. Penney's 1,014-store portfolio, less than 5% of total annual sales, less than 2% of earnings before interest, tax, depreciation and amortization and 0% of net income.

Dive Insight:

J.C. Penney says the measures will generate annual cost savings of some $200 million, mainly by saving on occupancy, payroll, home office support, corporate administration and other store-related expenses. To soften the impact of the closures on its store workers, Penney is instituting a voluntary early retirement program for thousands of eligible employees.

It's a bold step, but necessary, according to GlobalData Retail managing director Neil Saunders. “The blunt truth is that from a financial standpoint, some of these stores are just not working and future investment in them cannot be justified,” Saunders said in a note emailed to Retail Dive. “In our view, this fairly aggressive action is sensible. At a stroke it will improve JCP’s same-store sales numbers as these outlets are the ones dragging down the company’s performance. It will also allow the group to direct capital and resources to the stores which have the best prospects of delivering profitable growth. Admittedly, there will be a short term impact on the bottom line from lease termination and staff severance costs, which we expect to hit during the first half of the upcoming fiscal year.”

Ellison said that limiting J.C. Penney's footprint to only its top-performing physical stores can provide a competitive advantage. ”During the year, it became evident the stores that could fully execute the company's growth initiatives of beauty, home refresh and special sizes generated significantly higher sales, and a more vibrant in-store shopping environment," he said. "We believe the relevance of our brick-and-mortar portfolio will be driven by the implementation of these initiatives consistently to a larger percent of our stores. Therefore, our decision to close stores will allow us to raise the overall brand standard of the company and allocate capital more efficiently.”

Saunders agrees that a stronger physical store base allows Penney to focus on areas of needed improvement. “With a slimmed-down store portfolio, JCP will be able to focus on making its remaining stores more of a destination. This is essential as while progress has been made on categories like home, other departments still require attention,” he said. “Foremost among these is womenswear, where JCP — like many other players — is still suffering. This is disappointing, especially given the success JCP has had in driving female traffic to its stores from the Sephora [beauty] concessions. In our view, JCP needs to thin out its clothing assortment and make the section easier to shop.”

J.C. Penney nevertheless turned a profit in the fourth quarter, supported by strong sales in home, its Sephora beauty concessions, salons and fine jewelry. Profit climbed to $192 million, or 61 cents per share, up from a loss of $131 million, or 43 cents per share, in the year-ago period. Q4 net sales dropped 0.9% to $ 3.96 billion from $4 billion a year ago, and same-store sales fell 0.7%: Thompson Reuters analysts had anticipated profit of 61 cents per share and a sales decline of 0.4% to $3.98 billion.

That's no small feat in this retail environment, especially compared to struggling rivals like Macy’s and Kohl’s, and considering that the results are coming off Penney's relatively strong performance in recent quarters, according to Saunders. And though the retailer saw a sales decline, the real story is in its profits, Saunders added: “In our view, this alone serves as evidence that Marvin Ellison’s turnaround plan is delivering and that JCP is finally getting its house in order.” Even so, gross margins were hit by discounts (mitigated by e-commerce growth and sales of major appliances, a space the retailer re-entered last year): Q4 gross margin was 33.1% of sales, a 100-basis point decline compared to the same period last year, the company said.