JC Penney (JCP, Financial) posted better-than-expected results for the second quarter of 2014 on the back of strong stylish merchandising, pricing initiatives and resilient performance of its entire product category across the board such as women’s and men’s apparel and accessories, home and fine jewelry. Moreover, its turnaround initiatives have helped the company regain the market share it had once lost during the turnaround phase and improved its gross margin by 640 basis points in the cut-through retail environment, where rivals like Kohl’s Corp (KSS, Financial), Walmart (WMT, Financial), and Macy’s Inc (M, Financial) are accelerating the promotional activities.
JC Penney reported remarkable improvement of approximately 70.6% in its net loss that came in at $172 million or earnings of $0.56 per share as compared to net loss of $586 million or earnings of $2.66 per share in a year earlier quarter, beating the consensus estimates of $0.97 in earnings per share for the second-quarter 2014. In addition, its net sales for the quarter rose about 8% to $2.80 billion as against $2.66 billion sales reported in the same quarter last year. Its same store sales accelerated nearly 6.8%, while the online sales through jcp.com surged almost 16.7% for the quarter year-on-year basis.
The turnaround is on track
Meanwhile, the recent report by the Commerce Department unveils an indifferent behavior of consumers in the retail segment that is being reflected in most of the retailer’s recent results. The report displayed comparatively a slow or flat movement in retail sales in July that failed to match 1.5% hike in March. JC Penney’s rivals like kohl’s and Walmart also reported weaker results. Kohl’s sales for the second quarter dropped approximately 1.1% to $4.24 billion and reported a flat net income for the quarter, while Walmart kept experiencing a slowdown in the traffic at its U.S stores that pressurized its EPS growth.
However, Walmart deposited an uptick of 2.8% in the earnings for the quarter but has lowered the earnings outlook for the year. Walmart now expects earnings per share to range between $4.90 and $5.15 per share, which is below from its earlier guidelines of $5.15 to $5.45 earnings per share for the full year.
Nevertheless, JC Penney looks pretty strong and demonstrates a healthy outlook for the third and full year. The company expects its same-store sales to rise in mid-single digits while its gross margin for the third quarter is anticipated to remain in line with the second quarter of 2014. However Penney expects its SG&A expenses for the quarter to accelerate slightly over the third-quarter last year 2013. With respect to the full year, the company forecasts its same-store sales to increase in mid-single digits while its gross margin is expected to enhance significantly as compared to last year. It also expects its free cash flow to be positive for the year.
The situation is improving
Penney is experiencing strong traffic at most of its stores across the U.S, which is driving positive store conversion, improved average transaction size, and enhanced average unit retail, driven by two most happening business segment such as ‘women’s and men’s apparel and accessories’ and ‘home and fine jewelry’. In addition, Penney is also observing strong traction in the market for its Sephora business that continues to deliver high sales for the company.
Also, Penney inaugurated about 13 new Sephora stores during the second-quarter and stretched 8 of its high performance stores inside JC Penney stores. Penney has observed strong sales momentum at the start of back-to-school season and expects the momentum to continue throughout the quarter that should drive its sales for the third quarter 2014. Sephora business unit grew about 25% since the commencement of the business, while its stores opened for at least a year deposited handy growth of 11% in the second-quarter.
Additionally, JC Penney is aggressively engaged in executing three key priorities this year such as merchandise, Omni channel and marketing, which should drive its growth and help the company to gain market share going forward. Penney’s merchandising model is concentrated by making deep and narrow assortments for most of its brands.
Penney at the same time is actively involved in building strategic relationship with the leading national brands like Nike (NKE, Financial), Carter's, Maidenform (MFB, Financial), IZOD, and Van Heusen. JC Penney remains on track to bring these brands to its JC Penney stores across U.S. as well as on jcp.com. Most of these brands are already available at its JC Penney stores and generating enhanced footfalls at its stores, assisting the company in positive conversions of sales.
Omni-channel moves
Furthermore, its Omni-channel initiatives are driving sales for its jcp.com, and the company remains committed to becoming the number one retailer in the coming years in online sales. Penney is seeing tremendous tractions in the online orders, driven by customer friendly options at its sites such as sizes, styles or colors at its jcp.com that are guiding the customers to place the order right at the point of sales on their respective handheld device. Penney has enhanced its jcp.com with another option added recently like "Find it, keep it" that is gaining a lot of popularity among customers should help the company to convert more sales going forward.
Penney is determined to execute marketing initiatives with the campaigns that best resonates its renewed products, values and its quality. With back-to-school season, this campaign should help the company get involved with its customer in a productive manner generating higher sales. Moreover, the company considers its unique value proposition, strong connection with customers and renewed position of its business to create a competitive advantage over its peers going forward.
Conclusion
JC Penney has picked up the momentum and looks solid in the future as it has renovated most of its business units and closed the stores that have a comparatively weak conversion ratio. Penney has closed approximately 33 stores this year and looks forward to shutting down another 100 stores by the end of next year.
