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Analysis: J.C. Penney finally getting its house in order


Commentary by Neil Saunders, managing director of GlobalData Retail, comments on J.C. Penney’s fourth quarter:

Although JCP ended its fiscal year with a shrink in sales, it can take some comfort from the fact that the decreases are modest and that it managed to outperform its main department store rivals.

Indeed, it is notable that unlike Macy’s and Kohl’s, JCP’s sales numbers come off the back of fairly strong positive growth in the prior year. As such, while we would stop short of calling these results a triumph, they are certainly an achievement of sorts.

Putting sales to one side, the most encouraging number from these results sits on the profit line. Here, JCP has managed to turn around a quarterly net loss of $131 million last year to a profit of $192 million this time around. This transformation has pushed the group $1 million into the black for the full fiscal year – a marked improvement on last year’s $513 million loss, and the first time since 2010 that it has posted a profit for the full fiscal.

In our view, this alone serves as evidence that Marvin Ellison’s turnaround plan is delivering and that JCP is finally getting its house in order.

All that said, this is not the end of the road in terms of the transformation, which we believe has much further to run. This is one of the reasons why JCP will shutter 130-140 stores and two distribution centers over the next few months. The blunt truth is that from a financial standpoint, some of these stores are just not working and future investment in them cannot be justified. It is notable that while the stores earmarked for closure represent about 13-14% of the estate, they generate less than 5% of sales and contribute nothing to net income.

In our view this fairly aggressive action is sensible. At a stroke it will improve JCP’s same-store sales numbers as these outlets are the ones dragging down the company’s performance. It will also allow the group to direct capital and resources to the stores which have the best prospects of delivering profitable growth. Admittedly, there will be a short term impact on the bottom line from lease termination and staff severance costs, which we expect to hit during the first half of the upcoming fiscal year.

With a slimmed down store portfolio, JCP will be able to focus on making its remaining stores more of a destination. This is essential as while progress has been made on categories like home, other departments still require attention. Foremost among these is womenswear, where JCP – like many other players – is still suffering. This is disappointing, especially given the success JCP has had in driving female traffic to its stores from the Sephora concessions. In our view JCP needs to thin out its clothing assortment and make the section easier to shop.

Overall, we are heartened by the steps JCP has taken to turn around the business. This is evident in the energy seen in stores, which is markedly different from other players. However, we are also encouraged that the company is grasping the nettle in terms of rightsizing to align with changing consumer demand.
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