Penney overhaul a drag on profit

Shoppers mill about in a J.C. Penney store in Plano, Texas. The retailer on Friday reported a loss of $123 million in the three months that ended Oct. 27.
Shoppers mill about in a J.C. Penney store in Plano, Texas. The retailer on Friday reported a loss of $123 million in the three months that ended Oct. 27.

— J.C. Penney Co. on Friday reported a third-quarter loss that was larger than analysts had estimated as Chief Executive Officer Ron Johnson struggles to overhaul the fourth-largest U.S. department-store company.

The net loss of $123 million, or 56 cents a share, in the three months that ended Oct. 27 compares with a loss of $143 million, or 67 cents, a year earlier, the Plano, Texas-based company said in a statement.

Excluding restructuring and management-transition costs, the loss was 93 cents a share. The average of analysts’ estimates compiled by Bloomberg was for a 7-cent loss.

Johnson, the former Apple Inc. retail chief who joined as chief executive last year, has lost customers as he transforms most J.C. Penney stores into collections of branded shops and implements an everyday low-pricing strategy. J.C. Penney is “a tale of two companies” with the oldstyle stores facing “significant challenges,” Johnson said Friday.

“The results that J.C. Penney reported ... are undeniably weak,” Brian Nagel, an analyst at Oppenheimer & Co., said Friday in a note. “JCP will require a lot of patience on the part of investors. This chain continues to head towards turnaround.”

J.C. Penney shares fell 4.8 percent to close at $20.64 in New York, after earlier declining as much as 10 percent for the biggest intra- day drop since Sept. 20. The shares lost 38 percent this year through Thursday, compared with gains at Macy’s Inc., Kohl’s Corp. and Sears Holdings Corp.

The retailer’s third-quarter sales fell 27 percent to $2.93 billion, trailing analysts’ average estimate of $3.27 billion. Revenue declined by more than 20 percent in the first and second quarters. Samestore sales fell 26 percent in the third quarter, more than the 15 percent decline estimated by analysts surveyed by researcher Retail Metrics Inc.

The company’s gross margin narrowed to 32.5 percent from 37.4 percent a year earlier, hurt by lower-than-expected sales in the quarter and an increase in clearance merchandise sales.

J.C. Penney incurred $34 million in restructuring and management transition charges in the quarter, according to the statement.

In September, Johnson took 300 analysts on a tour of the company’s 30,000-squarefoot prototype in Texas to help communicate his vision for turning J.C. Penney into a “specialty department store.” He said at the time results at the company’s boutiques, installed in almost 700 of its stores, were beating comparable sales of other merchandise.

The retailer’s branded shops are proving to be more productive on a sales-persquare foot basis, Johnson said during a conference call with analysts.

“If we can get a lift like that, you can imagine what will happen to the business as we move into the back half of next year, and that’s why we’re so excited about where we’re headed,” he said.

J.C. Penney has worked to win back shoppers through offers such as a $10 in-store coupon, 30 percent discounts off clearance items, free children’s haircuts and free family portraits. Traffic fell 12 percent in the quarter, which lacks a shopping event such as Valentine’s Day or Christmas, Johnson said.

The company will add suggested retail prices to its merchandise so customers can see how much they’re saving, and will match discounts on national brands such as Jockey when they are running sales, Johnson said. Discounted designer-wear chains such as Nordstrom, Rack and T.J. Maxx typically display original retail prices at their stores.

The retailer was willing to let sales drop to establish a new base for the evolving J.C. Penney, which may be the “fastest-growing startup in retail history,” Johnson said.

“Job number one is to return to growth next year,” he said.

J.C. Penney plans to end the year with about $1 billion in cash and has not drawn from its $1.5 billion line of credit, Chief Financial Officer Ken Hannah said Friday. The retailer is set to fund its transformation in the next 36 months “without compromising that liquidity position,” he said.

Business, Pages 31 on 11/10/2012

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