J.C. Penney on Friday said that its third quarter was hit less than expected by a drastic liquidation of women’s apparel, though the move did hit profits. Total Q3 net sales fell 1.8% to $2.81 billion compared to $2.86 billion in the year-ago period, mostly because of the 139 store closures through the end of the quarter, according to a company press release. That was the 19th quarterly loss in the last 23 quarters, according to Retail Metrics analysts, and beat the Retail Metrics consensus estimate of $2.77 billion.
Same-store sales in the quarter rose 1.7%, compared to the 0.8% decline in the year-ago period, resulting in a positive two-year stack of 0.9%, the company said. That beat the retailer’s own guidance last month of 0.6%-0.8% and the Retail Metrics consensus 0.7% estimate. It was also its first positive turn in 2017 in that measure, since its 1.5% gain in the fourth quarter last year, Retail Metrics noted, and the best showing since the second quarter last year, according to CEO Marvin Ellison.
The drastic liquidation wasn’t the only reason for the same-store sales boost, which were positive in September, October and for the third quarter, executives said. But given the markdowns, margins were hit hard. Third quarter gross margins were 34%, declining 330 basis points from 37.3% a year ago, although inventory levels declined 8.8% from the year-ago period. Omnichannel initiatives continued to drive "strong double-digit growth in the quarter," Ellison noted.
J.C. Penney is in the midst of a few drastic maneuvers — the most dramatic approach since the radical measures brought on when former Apple retail guru Ron Johnson was CEO from 2011 to 2013. At the time, Johnson attempted a rapid shift in product assortment but his moves were deemed too extreme and too fast. Leadership since his abrupt departure has spent a fair bit of energy unwinding many of his changes, including the abandonment of layered price markdowns in favor of "always low prices."
Ellison alluded to that in a conference call with analysts Friday, saying that "the key for us is just really simplicity," according to a transcript of the call from Seeking Alpha, though he stopped short of endorsing Johnson’s approach.
"We've conducted quite a few focus groups and we spent a lot of times understanding, what types of promotional cadence and marketing handle resonate with customers, and we found out in a lot of cases that we were just overly confusing and overly complicating, what price and value really stood it for. And so we took a step back and we started to just offer more simplicity in the message," he said. "It's really important for us to make sure that we understand that our customer is looking for value and they're looking for price. It doesn't mean that we transition from high low to everyday low."
While the discount department store appeared to right the ship after Johnson's departure, it continues to stumble, warns Retail Metrics president Ken Perkins. "While J.C. Penney has stabilized the business and put it back on a more solid footing since the Ron Johnson debacle, they have still posted red ink in five of the last seven quarters dating back to the start of 2016," according to a note emailed to Retail Dive.
In addition to a new pricing strategy, which executives on Friday noted now involves data analytics, the company is moving toward a swifter approach to trendy styles in women’s apparel similar to fast fashion brands. "We are implementing our new strategy for fast frequent fashion across women's and other categories," Ellison said. “Our goal is to consistently deliver newness in key brands … to give the customers something new and exciting when they visit our stores or online. By infusing newness monthly and in some cases even weekly we are going to take the women's area and give our customers a clear reason to visit us more often, more frequently to see what’s trending and what is relevant."
That, too, will take a combination of human expertise and data analytics, Ellison said, noting that under chief merchant John Tighe, whose departure was announced earlier this month, the offering hasn’t always been on trend.
"In the past J.C. Penney has been over-assorted in more traditional women's clothing and under-assorted in casual and contemporary women's clothing," he said, adding that the retailer’s pivot includes more merchandise in "winning categories like active” including its partnerships with Nike and Adidas. In fact, Ellison said, Adidas will be added to almost 200 more stores this holiday season. He also hailed the retailer’s recent partnerships with key designers, including Libby Edelman and Tracee Ellis Ross, as examples of a new style era.
The retailer also saw traction in appliance sales and its Sephora beauty departments in the quarter. Appliance sales more than doubled year over year and same-store sales demand rose 30% in the third quarter, Ellison said. "We are clearly winning share in this category and excited to drive significant gains in the holiday season as well."
Other categories that outperformed overall same-store sales included home, Sephora, footwear and handbags, and salon. Fine Jewelry and Women also comped positively for the third quarter period, executives said.
Amid all these changes, though, the department store has to keep its core customer in mind, warned Gordon Haskett analyst Chuck Grom, adding that its promised shift to such a swiftly changing apparel play could be expensive.
"How does the company manage its cost structure in light of a quickly changing mix of sales (both product and channel)?" Grom asked in a note emailed to Retail Dive. "[And] with Sephora in approximately 70% of the chain today (and growing) and an evolving apparel strategy that is moving away from its historical contemporary strategy, how can Penney’s alter its brand perception so the changes resonate (and not alienate) its core shopper? In our view, over-coming these challenges will be paramount as we move into 2018."
Perhaps it will help prove once and for all whether Ron Johnson was right.