Store closures eat up J.C. Penney's margins
- J. C. Penney managed to increase net sales by 1.5%, to $3 billion, in the second quarter compared to the year-ago period, even as a mass of store closures and liquidations weighed on the company’s margins, according to a company press release. The sales figure narrowly beat the FactSet consensus of $2.92 billion, according to MarketWatch. Comparable sales fell by 1.3%.
- The department store retailer’s profit numbers disappointed Wall Street as the company posted a net loss of $62 million, or 20 cents per share, compared to a net loss of $56 million in Q2 last year. FactSet consensus had anticipated a 4 cent loss, according to MarketWatch. While the retailer reduced its administrative expenses by $11 million, the cost of goods sold were $100 million higher than Q2 2016, which the company attributed to store liquidation costs.
- During the second quarter Penney liquidated inventory in 127 stores closed as part of a restructuring program. J.C. Penney CEO Marvin Ellison said in an investor call Friday that the liquidations diluted margins by 120 basis points. For the year, executives anticipate adjusted earnings per share of between 40 cents and 65 cents,and for comparable sales to land between a 1% decline and 1% increase.
J.C. Penney provided yet another mixed snapshot of the department store sector in a string of recent earnings releases. After Macy’s and Kohl’s both posted net sales declines but positive earnings, Penney flipped the story, with sales growth and a wider-than-expected loss.
Shareholders weren’t pleased with any of the companies, which all saw same-store sales drop in Q2. Penney’s stock fell 16.4% in premarket trading after the company posted earnings. But Ellison tried to reassure analysts on Friday that margin pressures were largely influenced by the store closures, which the company was determined to complete before the back-to-school season went into full swing.
Ellison also pointed to a handful of bright spots for the company. Home, beauty and kids apparel, previously a laggard, all saw strong growth (kids apparel to the tune of 700 basis points from Q1 to Q2, Ellison said). The company is also deepening its foray into appliance sales, including through a new partnership with Electrolux to sell Frigidaire kitchen appliances. Ellison noted that Penney opened 100 new appliance showrooms in May and appliance sales provided a 300 basis point "positive benefit" during the quarter.
Penney is also expanding beauty offerings through its partnership with cosmetic retailer Sephora. By the end of the year, 75% of company stores will have a Sephora in them, making Penney the only retailer with Sephora, salons and jewelry offerings under one roof, according to Ellison.
All that said, Penney’s Q2 performance was still "underwhelming," Neil Saunders, managing director of GlobalData, said in comments emailed to Retail Dive. "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," he said.
In particular, Saunders pointed to the "much further work" Penney needs to do to improve retail sales, where womenswear especially remains "lackluster" in a flooded market often full of discounted merchandise. Against that backdrop, Penney needs to "work much harder to create a compelling and well-defined fashion assortment," Saunders said.
To that end, Ellison said on Friday’s call that the company was trying to "fix women’s apparel" by liquidating "less desirable inventory" to make room for more casualwear. Penney is also expanding its women’s activewear offerings through partnerships with Nike and Adidas
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