J.C. Penney reports hefty 3Q loss

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Associated Press

Posted on November 9, 2012 at 7:01 AM

Updated Saturday, Nov 10 at 1:01 AM

NEW YORK (AP) — J.C. Penney Co. is hoping it has hit rock bottom.

The bad news keeps getting worse for the struggling department-store chain that on Friday reported a wider third-quarter loss than Wall Street expected on a nearly 27 percent drop in revenue. That marks the third consecutive quarter of big losses and sales declines as customers continue to show that they're unhappy with Penney's decision this year to ditch hundreds of coupons and annual sales in favor of everyday low pricing.

The poor results underscore the challenges facing Penney's CEO Ron Johnson, the former Apple Inc. executive who was brought in a year ago to turnaround the struggling retailer. Since then Johnson, who masterminded Apple's popular retail stores, has been working to change everything at Penney, from its stores to its merchandise.

Penney is starting to see some positive results from the makeover this fall of 700 of its 1,100 stores with sectioned-off shops inside each that feature different brands such as Levi's and Penney's new line of casual clothes. The company said overall sales from the shops-within-stores are strong. But the continuing negative response to the company's everyday low pricing strategy has more than offset the boost.

During the third quarter, revenue at stores open at least a year plummeted 26.1 percent. That's higher than the 17.6 percent drop analysts had been expecting. Meanwhile, the number of customers coming into the store dropped 12 percent from the year-ago period.

"I expected horrific but this was worse than expected," said Brian Sozzi, a chief equities analyst for research firm NBG Productions that follows Penney.

During an investor meeting in New York on Friday, Johnson and other officials spent time assuring investors that although Penney has reported big losses, the company has enough money to finance its transformation. And Johnson, who has acknowledged for months that his plan has been more challenging than he originally thought, reiterated his confidence in his strategy but said he'd make changes as necessary to ensure success.

"Job No. 1 is to return to growth next year. Let's make no mistake about it. This is a year where we said we are willing to let the sales drop to establish a new base for the new JCP," he said Friday. "We have to return to growth."

That's the same tone Johnson has maintained since he rolled out his ambitious plan to change the way people shop. On Feb. 1, Johnson launched the pricing strategy that was designed to wean customers off the markdowns they'd become accustomed to, but that ultimately eat into profits.

He got rid of the nearly 600 sales Penney offered at various times throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, offered monthlong deeper discounts on select items and periodic clearance events throughout the year.

But as Penney's coupons and sales disappeared, so did its customers. The company recorded a big loss on a 20 percent drop in revenue in the first quarter. Seeing that as a referendum on whether customers liked the new pricing, Johnson decided to make changes.

Six months after he rolled out the plan, Johnson tweaked pricing again. On Aug. 1 — just days before Penney posted another big loss on a second straight quarter of disappointing revenue — Johnson eliminated one tier of the pricing plan, the monthlong sales.

But that decision may have hurt more than it helped. Johnson on Friday said one big factor that dragged down the latest quarter's sales was the elimination of Penney's monthlong discounts, which he says confused shoppers who like to compare prices. In fact, Johnson said Penney lost $20 million a week in sales associated with getting rid of the monthlong discounts for a total sales loss of $260 million for the quarter.

So Johnson said that he'll make changes again. Penney won't be bringing back the monthlong sales, but it now will begin displaying on price tags the "suggested" price from clothing and other manufacturers along with Penney's "everyday" price.

Johnson also said that Penney will have a big sale on the day after Thanksgiving known as Black Friday — the traditional start of the busy holiday shopping season. The company declined to comment further, but said it expects to release details on Monday.

"Each quarter, we learn a lot. We adapt. We try to move forward," Johnson told investors on Friday.

Aside from outlining tweaks to his plan, Johnson on Friday touted the early success of the 10 shops that Penney has rolled out this fall have been well received.

The company said so far that it has converted about 11 percent of the floor space to these shops and that area has on average generated $269 per square foot — or more than double the revenue per square foot in the rest of the store. Penney plans to bring in more mini-shops featuring Martha Stewart, Michael Graves and others next spring.

In total, the company plans to add 100 shops inside each of 700 stores by 2015. Penney's remaining 400 stores are in small towns and won't feature the full makeover. Surrounding those shops will be extra-wide aisles that Johnson calls "streets." Along those pathways will be ice cream and coffee bars and wood tables with built-in iPad tablet computers shoppers can use. In the middle of it all, a Town Square will offer activities like Pilates.

Ultimately, analysts say that the success of Penney will depend on whether the company can make its stores fun places to shop. But the retailer has a long way to go toward revamping its business.

Penney, based in Plano, Texas, said it lost 56 cents per share, or $123 million in the quarter ended Oct. 27. That compares with a loss of $143 million, or 67 cents per share, in the year ago period when results were dragged down by costs related to the management transition and a voluntary retirement program. Revenue dropped 26.6 percent to $2.93 billion in the quarter. Analysts had expected a loss of 15 cents a share on revenue of $3.27 billion.

On the news, Penney stock fell 5 percent, or $1.05, on Friday to close at $20.64. Investors, who initially sent Penney stock soaring 24 percent to about $43 after the company announced the pricing plan in late January, have pushed them down 40 percent since the beginning of the year.

Sozzi, the analyst at NBG Productions, said even if investors — and Penney's board — are worried, they'll likely give Johnson more time to see if his strategy will work. After all, he said, the company is beginning to see some results in the mini-shops.

"The parts of the store that he has touched are working," he said. "There's still hope priced in the stock."

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