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Analysis: J.C. Penney feels ‘increasingly tired and lacking in spirit’

Yesterday's strong retail sales numbers confirm the fact that there is something of a party going on in retail, with consumers spending in a relatively carefree way. However, this is a party to which J.C. Penney was not invited. Its weak sales figures, which rose by a lamentable 0.3% on a comparable basis, suggest that while other players were enjoying the festivities, it was soundly asleep.

The most worrying thing about the results is that if JCP can't perk itself up at a time when the retail mood is elevated, it suggests that there are fundamental weaknesses in the company's position. This is now be all the more difficult to remedy given the lack of a proper leadership team following the departure of Marvin Ellison and a number of other executives.

One of the key problem areas is fashion where JCP remains unfocused and unsure about its strategy. Indeed, the company has changed direction several times -- first trying to attract younger shoppers, then younger moms, and now back to older shoppers. In our view, this flailing around is a symptom of a wider problem in that J.C. Penney no longer has a sense of what it wants to be and who it wants to serve. It is, therefore, in something of a no man's land and fails to inspire anyone in particular.

Some steps have been taken to remedy this issue by reducing inventory commitments in apparel, for example. However, it is not enough simply to buy less. JCP needs to have a clear view of who it is buying for and then relentlessly focus on producing a well-targeted range that is differentiated and inspiring. In our view, JCP is a long way from getting this right. As such, even with modest improvements, the results from fashion are unlikely to improve significantly over the balance of this year.

Other categories might produce stronger numbers, but even here the outcome is not certain. The decision to move more squarely into the baby segment by opening new departments in shops has some potential, especially following the demise of Toys 'R' Us.

However, we see this as a rather opportunistic move that is not underpinned by any clarity on how JCP is going to create a unique and compelling proposition. It is similar to the decision to move into appliances: the reasoning is sound, but the execution and strategy are lacking.

As ever, Sephora performed well and managed to drive both sales growth and pull in shoppers. However, JCP does not really deserve credit for this as it is merely reaping some of the benefits of another company's brand strength. That said, we maintain our view that the presence of Sephora in JCP stores gives the company a chance as it brings people into shops. What JCP has to do is find ways of converting these shoppers into buying other categories.

Worryingly for JCP, a lack of progress on the top line comes at a time of bottom line weakness. This quarter, the company made an operating loss of $36 million and a net loss of $101 million. Debt levels also remain high. It is hard to see how the company will turn this around in the near-term, especially with a vacuum in the leadership team.

Overall, we remain somber about JCP. The company just feels increasingly tired and lacking in spirit.
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