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J. C. Penney Plunges, Div Shelved

Zacks Equity Research

Looks like nothing is going in favor of J. C. Penney Company Inc. (JCP) and all it efforts are failing to mirror the kind of results that Ron Johnson, the Chief Executive Officer, actually thought of. The company undertook a slew of measures, which include pricing strategies and merchandising initiatives, to become America’s favorite store. However, the dismal first-quarter 2012 results dashed those hopes at least for the near term. Also, the news of suspension of the quarterly dividend of 20 cents was not welcomed by the investors.

Through the dividend suspension, the company intends to save $175 million annually in cash to be utilized for funding the transformation process. This, along with the first quarter debacle was enough to exert pressure on the stock, which fell 12.2% or $4.05 to $29.27 during after-market trading hours on Tuesday. The quarter was tougher than what management had envisioned.

Let’s Unveil the Picture

The retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishing, posted quarterly loss of 25 cents a share compared with earnings of 36 cents in the year-ago quarter. Analysts polled by Zacks had expected the company to post a loss of 11 cents. Despite posting a disappointing bottom line, management reiterated its fiscal 2012 earnings guidance at $2.16, excluding markdowns, restructuring charges and non-cash qualified pension expense.

On a reported basis, including one-time items, quarterly loss came in at 75 cents compared with earnings of 28 cents in the prior-year quarter. Management also hinted that it might not be able to meet its fiscal 2012 GAAP earnings projection of $1.59 per share due to additional inventory write-downs and restructuring charges. 

The quarterly sales of $3,152 million dropped 20.1% from the prior-year quarter, and fell short of the Zacks Consensus Estimate of $3,443 million. Total sales were also adversely affected by the discontinuation of the catalog outlet business. Internet sales via jcp.com declined 27.9% to $271 million in the quarter.

Comparable-store sales plunged 18.9% during the quarter compared with an increase of 3.8% in the prior-year period. Management stated that traffic fell 10% during the quarter. With no discount coupons in their hands and difficulty in understanding the new pricing structure, customers did not respond as well as expected. The company admitted that it needs to be more vocal about its pricing mechanism and better align its marketing efforts to send clear signals to customers.

Adjusted gross profit fell 22.3% to $1,239 million, whereas gross profit margin contracted 120 basis points to 39.3%, reflecting lower sales and increased markdowns to clean inventory. The company posted operating loss of $48 million compared with an operating income of $192 million in the year-ago period.  

Other Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $839 million, total long-term debt of $3,102 million and shareholders’ equity of $3,936 million. The company incurred capital expenditures of $107 million, paid dividend of $43 million and produced negative free cash flow of $727 million during the quarter. Capital expenditures are expected to be approximately $800 million for fiscal 2012 to supplement the company's transformational efforts. Management also expects to generate more than $1 billion in cash during the year.

Makeover on the Cards

J. C. Penney is in a transition process, trying to transform itself from the way it had operated before Ron Johnson took charge. He has the blueprint of the turnaround plan and remains optimistic about making the company the most favorite shopping destination. J. C. Penney repeated its assertion that it could self-fund the transformation through its retail business.

In order to uplift itself, J. C. Penney announced a string of measures, which include new pricing strategy (Everyday, Month-Long Values and Best Prices), fresh logo, strategic merchandise initiatives, cost reduction and enhancement of customers’ shopping experience, which in turn will augment store sales productivity, and lead to margin expansion and bottom-line growth.

The company aims to reduce costs by over $900 million by the end of fiscal 2012 given the operational efficiencies and sustained efforts to contain costs effectively.

Seeking Opportunities

An economy in a state of hibernation remains a bitter truth but relentless efforts to emerge from the doldrums cannot be ignored. Even J. C. Penney is trying every means to tide over a distressed economy.

Its acquisition of a 16.6% stake in Martha Stewart Living Omnimedia Inc. (MSO), an integrated media and merchandising company, is just another step towards uplifting itself. The company is betting hard on Martha Stewart to be a fortune changer. The alliance between the two took place on December 7, 2011 and calls for a ‘store-within-a store’ concept. This means that an extensive range of home and lifestyle merchandise designed by Martha Stewart can now be found in a J. C. Penney shop.

In October 2011, J. C. Penney entered into an asset buyout agreement with Liz Claiborne. Per the deal, J. C. Penney acquired the global rights for the Liz Claiborne portfolio of brands and the U.S. and Puerto Rico rights for Monet, a fashion jewelry brand, for $267.5 million.

J. C. Penney is all set to add fresh brands to its portfolio. These would include names like jcp brand, DREAMPOP, Betseyville, Lulu Guinness, Vivienne Tam, Royal Velvet and DC. The company also plans to increase its collection across brands such as Liz Claiborne, Puma, Exertion, Nike, Worthington and Stafford.

The company also hinted of opening first 10 in-store departments, incorporating brands such as Arizona Jeans, IZOD, Liz Claiborne, jcp, Levi’s and Buffalo. The company’s store remodeling program includes a plan of having 100 in-store brand shops. The company has also entered into partnerships with Jonathan Adler, Bodum, Conran, Georgina Chapman, William Rast, Nanette Lepore and Tourneau.


After the hiring of Ron Johnson and the ongoing radical change and a complete makeover plan, J. C. Penney is gradually adding all the ingredients that a company needs to attract customers’ fancy. However, the company’s lackluster performance put it on the back foot while many of its peers have walked away with impressive numbers. So, there remains a Herculean task for the company to identify its strengths and channelize those in the right direction to put itself back on the growth trajectory.

J. C. Penney, which competes with Macy’s Inc. (M) and Kohl’s Corporation (KSS) , currently operates approximately 1,100 department stores in the United States and Puerto Rico. Currently, we have a long-term “Neutral” recommendation on the stock. However, J. C. Penney holds a Zacks #4 Rank that translates into a short-term “Sell” rating.

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