J.C. Penney's loss is a 'necessary evil' during turnaround

Dive Brief:

J.C. Penney on Friday reported a first quarter net loss of $180 million or 58 cents per share, worse than the $68 million net loss or 22 cents per share in the year-ago period, as overall sales fell 3.7% to $2.7 billion (from $2.8 billion a year ago) and same-store sales fell 3.5%. That missed the Thomson Reuters analyst forecast for a loss of 21 cents per share and a sales decline of 1.4%, according to the Dallas Morning News.
The discount department store’s investments in pricing and merchandising systems, combined with growth in appliances and e-commerce, led to a 10 basis point increase in gross margin compared to the year-ago quarter, according to a company press release. Same-store sales rose in home, fine jewelry and salon categories, as well as its Sephora concession shops, and they were the top performing divisions in the quarter.
Despite the tough quarter, the company reaffirmed its 2017 full year guidance. Executives expect same-store sales growth to fall between a 1% decline and a 1% rise and gross margins to rise 20 to 40 basis points over the prior year.

Dive Insight:

Shares slid 7.4% in Friday premarket trading after the report. In his statement Friday, CEO Marvin R. Ellison took pains to note that the retailer’s first quarter improved after February.

"While February was a very challenging month for JCPenney and broader retail, we are pleased with our comp store sales for the combined March and April period, which improved significantly,” he said. “Also, through our de-leveraging efforts and improved financial condition, we earned yet another credit rating upgrade this quarter. Our teams remain committed to executing on our strategic growth initiatives, and we are confident in our ability to drive sustainable growth and long-term profitability for JCPenney.”

Despite improvements in women’s apparel, which dragged down results last year, the retailer must redouble its effort in that category and continue marketing efforts to entice shoppers into its stores, GlobalData Retail managing director Neil Saunders said in a note emailed to Retail Dive. “Despite the enhancements made to date, the offer is still not compelling enough to drive sales,” Saunders said of J. C. Penney’s fashion play. “Spring collections showed some signs of improvement, but there is much more work to do here if JCP is to turn this into a winning category.”

The retailer's re-entry into appliance sales is proving to be a good move, especially against the backdrop of the ongoing struggles at Sears, Saunders said, but the company’s real star is its Sephora concessions. “The impact of having a popular beauty player as part of the offer cannot be underestimated,” he said “Without it, customer traffic and sales would have tumbled far further and faster; and JCP would have attracted far fewer younger shoppers.”

While J.C. Penney’s $105 million operating loss was much worse than last year's Q1 $22 million profit, the drop resulted largely from the company’s $220 million in restructuring charges related to its store closures, which Saunders called a “necessary evil.”

“Without these exceptional costs, JCP would have made an operating profit of $115 million,” Saunders noted. “In our view, this points to the fact that Marvin Ellison and his team are gradually improving the operational and financial health of the business. Despite this quarter’s setback, we have confidence that they are taking JCP in the right direction.”