To say that J.C. Penney is facing serious problems is an understatement.
The struggling department store’s stock plummeted on Aug. 16 more than 27 percent to $1.75 per share—the lowest level since the company’s listing on the New York Stock Exchange during the Great Depression in 1929, according to Reuters. This plunge followed the release of the retailer’s disappointing second-quarter earnings report, which fell short on both earnings and revenue.
The retailer reported a net loss of $101 million, or 32 cents per share, in its fiscal second quarter, even worse than Wall Street was anticipating. Adjusted net loss increased to $120 million, or 38 cents per share, from $23 million, or 7 cents per share a year ago. Same-store sales increased 0.3 percent; however, that was less than the 1.0 percent increase projected by analysts.
Total revenue fell to $2.83 billion from $3.07 billion, primarily due to store closings.
The Plano, Texas-based company also cut its guidance for the year. It now expects same-store sales to be “approximately flat,” and losses per share for the year to be between 80 cents and $1, which is significantly worse than its prior forecast of 7 cents to 13 cents.
The company’s balance sheet also shows major issues. The retailer has $182 million in cash, according to its earnings report, and more than $4 billion in long-term debt.
Is a turnaround possible for the chain, which was once a retail powerhouse?
Company brass says it’s taking steps to turn things around, including putting more items on clearance to get rid of excess inventory and right-sizing future inventory.
J.C. Penney also needs to find a new CEO. The company has been without a leader since Marvin Ellison jumped ship in May to join Lowe’s. While he made some progress before he left, the turnaround he was in charge of was far from complete.
“The most troubling aspect of Penney’s situation is that there is still no CEO,” says David Weiss, a partner at Chicago-based consulting firm McMillan Doolittle. “Ellison’s departure on May 22nd is already three months in the past. Potential candidates may want time to see if the strategies he left in place will gain momentum, or if there is truly nothing there but a slow bleed.”
The company says the search for a new chief executive is a top priority. “The process is going well and the board has met with highly qualified candidates,” said Ronald W. Tysoe, JC Penney board chairman, in a statement. “We will continue to expedite the process in order to bring this search to a successful conclusion.”
J.C. Penney has tried several turnaround efforts in the past; however, none seem to have panned out. Recent merchandise strategies haven't been working, and it’s not clear if a new CEO can fix the problems.
Ellison closed about 140 stores while at the helm, which leaves 860 stores in the U.S. and Puerto Rico. He also launched moves to start selling toys and appliances again and focus on beauty. Fixing the department store’s women’s apparel business also became a top priority.
“The team has tried to adapt. Getting women’s right and focusing on appliances and baby could be a positive move as Sears closes and Babies ‘R’ Us went out of business,” Weiss says.
The retailer is also reducing inventory. The thought is with less inventory, it can be more flexible and react to consumer demand and trends quicker.
“It’s a positive and a negative,” Weiss says. “The strategy seems to be ‘we’re going to stop buying as much until we identify things that are working, and we will then chase those things that are working.’ The downside is the continued reduction in inventory means stores will look and feel empty.”
Are the stores still relevant?
Whether the target customer still considers the retailer to be worth a visit is an “increasingly worrisome” issue, according to Weiss.
“That’s a huge problem as the marketplace has changed around them,” he says. “Can you adapt quickly enough to do anything? If you look at some of their competitors, Kohl’s has found a way to get people to come into their stores and that’s with the Amazon return, and it seems to be paying dividends. Target, which offers its own private-label apparel and accessories, has grocery to help get people to continue to come into the store. Wal-Mart partnered with Google. There are all of these reasons to shop at some of their key competitors.”
Weiss adds that J.C. Penney’s customer “loved the treasure hunt—pulling an insert out of the paper or at the store and arriving in time for a door buster event, visiting the deals that excited them.” In today’s environment, however, few people look for deals in the papers and emails tend to fall on deaf years. Moreover, J.C. Penney’s discount competitors offer a better “treasure hunt” experience.
In addition, much like its competitor Sears, JC Penney is struggling to adapt as more consumers shop online. It’s losing market share to Amazon, Target, Nordstrom and Wal-Mart.
J.C. Penney offers online shopping, but reported that sales slowed in the second quarter as they work to improve their online experience.
“Through this process, we've learned a lot about what our customer really wants to buy digitally online and how to drive sustainable profitable growth in this channel,” said Therace Risch, the company’s EVP, chief information officer and chief digital officer, on the latest earnings call.
“We very intentionally pulled back on our online sales as we make adjustments to that extended assortment so we can better meet the needs of our customer and we're focusing on improving the overall digital experience.”
Can the retailer come back?
One retail consultant believes J.C. Penney’s future is “hopeless.” However, he doesn’t blame Amazon. He just doesn’t see that the chain is relevant.
“J.C. Penney didn’t change their business model and the rest of the world did,” says Nick Egelanian, president of retail development consultants SiteWorks International.
Egelanian says the same is true for Macy’s and Sears.
“It’s just a matter of time. All of them have been steadily shrinking,” he notes. “If you look closely at who’s actually shopping at these stores, it’s an older demographic who’s comfortable there. But the new generation doesn’t need to shop there. They never did shop there and won’t shop there, so you’re going to continue to see volumes detract.”
Egelanian adds that in order to have a decent chance of surviving, these department store chains needed to start updating their business model roughly 30 years ago, but they failed to see the shifts in the big picture and didn’t make the necessary adjustments in time.
“Today they’re obsolete, and when you’re obsolete your business declines as your customer base declines, and that’s exactly what has happened,” he says