At J.C. Penney, Everything’s on Sale. Will That Be Enough?

(Bloomberg) -- Walk into a J.C. Penney and it’s a sea of red stickers. Almost everything is marked down, from apparel, jewelry and home goods to Christmas decor, bedding and appliances. And it’s not even Black Friday yet.

Even for a retailer whose identity is built on promotions and discounts, there’s an urgency to this holiday season. J.C. Penney Co.’s bonds are near record lows, its stock has slid toward a buck a share, and brand new Chief Executive Officer Jill Soltau is pushing her team to shovel out the dated goods that she says make the stores feel “over-assorted and heavy on inventory.”

Cruising a single store -- in this case, New York’s Herald Square -- it’s easy to see Soltau’s point. Racks are jammed with retro logo sweatshirts. Some of the womenswear skews to the frumpy side. And while someone may want leaves-and-berries dinner plates or toilet-shaped novelty coffee mugs, such merchandise hardly speaks to the modern shopper.

“They’re trying to dig themselves out of the abyss,” said Alex Arnold, a managing director of the consumer practice at investment bank Odeon Capital. “They are trying to churn out the bad products -- they need to monetize that inventory and start putting capital into items that will work.”

That abyss may be the fault of Soltau’s predecessors, but it’s hers to overcome since she was hired away from the Joann Stores fabrics-and-crafts chain in October.

“I’m just beginning to spend a lot of time with the customer and customer data and understanding exactly what our customer wants and desires for us,” Soltau told investors on a Nov. 15 earnings call. While Dallas-based J.C. Penney is making progress on a plan to clear slow-moving inventory by the end of the fiscal year that starts in February, “we know we have more work ahead of us.”

At J.C. Penney, Everything’s on Sale. Will That Be Enough?

J.C. Penney simply has too many apparel brands and too much product, said Neil Saunders, managing director of GlobalData Retail. “Some brands, like Alfred Dunner and Adonna, are rather old-fashioned and are not particularly on-trend. There are also some home brands, like Eva Longoria, that need to be cleared out,” he said.

Black Friday

J.C. Penney has to get this holiday season right or it could be one of its last Christmases, a former CEO of rival Walmart Inc.’s U.S. operations told Fox Business in an interview Tuesday.

“They are sort of backed into a corner,” without the financial strength to undergo transformations as Walmart and Target Corp. have done, Bill Simon said in the Fox interview. “Someone is going to gobble them up if they don’t have a good Christmas.”

At J.C. Penney, Everything’s on Sale. Will That Be Enough?

J.C. Penney representatives declined to comment on the company’s strategy, aside from pointing to executives’ discussions on the recent conference calls.

The urgency shows in the run-up to this week’s annual shopping frenzy. The company recently offered early discounts to “Beat the Black Friday Rush,” followed by the “Black Friday Warm Up.” Deals for Black Friday itself went online starting Nov. 18, with the full selection of markdowns available on Nov. 21.

And for the first time, the chain will carry those bargains into Saturday for the “Black Friday Extended Sale.” Then, the Cyber Monday sales kick off on Sunday.

The sales pitches of course aren’t isolated to J.C. Penney: Black Friday discounts have been inching earlier and earlier across the industry as retailers try to capture shoppers’ first dollars of holiday sales. Still, J.C. Penney’s push to scrap as much of its inventory as possible through bulk sales may spell more pain in the short term and put additional pressure on margins.

Balance Sheet

The company’s balance sheet shows that there’s not a whole lot of time for patience. Even though J.C. Penney says it currently has about $1.9 billion of liquidity, it’s also facing lagging sales. The company is saddled with almost $4 billion of debt, the majority of which comes due between now and 2025. While management has said it’s comfortable with the debt maturity profile, investors don’t seem as sure.

Its first- and second-lien bonds fell to record lows after third-quarter earnings were released. The cost of insuring the retailer’s debt also jumped to record highs after the earnings, signaling a 99 percent probability of default in the next five years. The retailer’s shares have been on a largely unbroken slide since 2012 to $1.29 as of Tuesday, after trading in the $80 range more than a decade ago.

At J.C. Penney, Everything’s on Sale. Will That Be Enough?

Still, if the chain can survive the short-term pain of essentially selling all its outdated inventory in a fire sale, the rewards could be big. Consumer confidence is high, median wages are on the rise and retailers -- at least those that don’t go the way of recently bankrupt Sears Holdings Corp. -- look poised for their best holiday season in years.

The company has said nothing is off the table. In addition to fixing inventory and merchandise problems, J.C. Penney needs to revamp its online efforts, an area where rivals have had success -- even if it comes at a high price.

E-commerce “is where the customer is today, and that’s where we need to be,” Soltau, whose three decades of industry experience includes time at Shopko, Sears and Kohl’s, said on the earnings call. “I have a huge sense of urgency around that.”

Failed Rivals

J.C. Penney is hoping to capitalize on the demise of competitors like Bon-Ton Stores Inc. and Toys ‘R’ Us Inc. Soltau said the retailer added 40 percent more to its toy assortment for the holiday season. And there are signs that locations that shared malls with stores from the now-liquidated Bon-Ton chain are already starting to perform better.

“This bodes well and speaks to the overall market-share opportunities that exist from competitor closings,” Trent Kruse, J.C. Penney’s head of investor relations, said on the call.

At J.C. Penney, Everything’s on Sale. Will That Be Enough?