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Analysis: Next six months critical to J.C. Penney survival

J.C. Penney has served up another slice of gloom with an incredibly bad set of sales numbers. That revenues should shrink by almost a tenth over the course of a year is incredible and shows how far the company has fallen. Admittedly, the decline is less severe once the deliberate pullback from categories like appliances and furniture are considered – but there is just no getting round the fact that J.C. Penney is losing customers hand over fist.

It does not take much effort to understand why customers are migrating away: most stores lack energy, interest and ease. They are not pleasant places to shop and offer little that is compelling, so customers increasingly avoid them. J.C. Penney has simply lost its relevance in the retail landscape and is suffering to a significant degree. This is a dangerous position for any business, but for a department store operation with extremely expensive overheads and an extensive amount of costly retail space it is little short of calamitous.

The net loss of $43 million on the bottom line reflects this dynamic and brings total losses in the year to date to $196 million. The magnitude of these losses underline that J.C. Penney is not only in a bad place from a proposition point of view, but that it has very little financial room for maneuver. To be fair, the financials are marginally better than they were a year ago and at operating level the company made a modest profit of $17 million. However, this was more than wiped out by the $74 million of interest expense. This alone shows the degree to which the company is running up a down escalator.

Of course, the fact J.C. Penney is broken is well known. The question is: can it be saved? On this front, we are not optimistic. We are impressed with some of the steps CEO Jill Soltau – who inherited this mess – has taken so far. But we question whether they can work quickly enough or if they will deliver to the degree required to save the company.

Most of the actions to date have been course corrections design to fix problems within the business. This includes putting in place an experienced top team, exiting low margin categories, improving inventory control and rebuilding some product margins, especially in apparel. All these things are necessary, and the company deserves credit for moving at pace to address them. However, while they take some pressure off the business and provide it with a sounder foundation on which to work, they do not solve the critical issue of making JCP relevant and meaningful to consumers. Only that can drive the topline growth that is so critical in moving the company back into the black.

The majority of JCP stores are in no fit state to facilitate growth. The range, selling environment, and general energy is all at odds with exciting and enticing customers. Addressing this, and persuading customers that things have changed, is incredibly difficult – especially in a consumer environment that while still benign is softening.

There are some signs that JCP wants to change this, such as its moderately reformatted stores in Texas where it is trialing new ideas. The partnership with thredUP to sell secondhand apparel and accessories in stores is another – although the impact of this is somewhat undermined by the fact Macy’s is also teaming up with thredUP. But these things are small scale and we believe some bigger, bolder initiatives – such as high profile launches of own-brand ranges – are needed to move the dial.

Looking ahead, JCP has very little breathing space. It has enough liquidity to function for now, but it also has a big debt pile and a broken business that needs investment to fix. Those things are uncomfortable bedfellows. The next six months will be critical. If trading can be stabilized and if JCP pulls some big initiatives out of its hat, there may be a chance. If not, we believe it will be a clear signal that the end of the runway is fast approaching.
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