J.C. Penney Logs Disappointing Sales But CEO Says Change Is Coming

(Bloomberg) -- J.C. Penney Co. got some welcome breathing room after signaling it’s making the hard choices now that could position it for a promised turnaround. The question is how much longer shareholders are willing to wait.

“The next six months will be critical,” said Neil Saunders, managing director of GlobalData Retail. “If trading can be stabilized and if JCP pulls some big initiatives out of its hat, there may be a chance. If not, we believe it will be a clear signal that the end of the runway is fast approaching.”

The company, which is at risk of delisting as its share price hovers below $1 per share, has been making tangible changes under its Chief Executive Officer Jill Soltau, who took the helm in October. Long lamenting its over-supply of product, J.C. Penney trimmed its inventory by 12.5% in the latest quarter and reduced its markdowns, which had been hurting sales.

Under Soltau, the company has also exited the major appliance business and moved its furniture sales online only. J.C. Penney has renovated its fitting rooms and added a new check-out process aimed at re-igniting growth and attracting new traffic. On Thursday, it said it’s wading into the resale market, announcing a tie-up with thredUP, an online consignment store. This comes a day after Macy’s Inc. announced a partnership with the same company.

Rebuilding Business

“We are not simply running a business -- we are rebuilding a business,” Soltau said. “While we still have work to do on our topline, I strongly believe that growing sales in an unprofitable way is simply not an option.”

Shareholders seem appeased. The retailer’s shares surged as much as 15%, before paring gains. Shares were up 5.1% to 60 cents as of 11:07 a.m. in New York.

“She’s following her plan,” Poonam Goyal, a Bloomberg Intelligence analyst, said.

But plans won’t keep them satisfied forever -- at some point investors will demand results. Same-store sales, a closely watched metric in retail, fell 9% in the latest quarter. That’s worse than analysts’ expectations for a drop of 5.3%, according to Consensus Metrix.

“This all sounds great, but with the environment that we’re in today, is the customer still preferring to shop at a big department store? How is she going to drive traffic? At some point, topline is going to become an issue,” Goyal said.

Tariff Troubles

Other retailers, like Walmart Inc., have been able to pull off sales gains. Walmart’s results, along with economic data released Thursday that showed stronger-than-expected U.S. retail sales in July, helped calm fears that the country is headed into recession, with equity indexes rebounding from Wednesday’s rout. But department stores like Macy’s and J.C. Penney are still struggling.

That’s because competition is ramping up from online rivals like Amazon.com Inc. and popular discount retailers like TJX Cos., which owns Marshalls and TJ Maxx. They’re also getting squeezed as the Trump administration ratchets up tariffs on Chinese goods. A levy on department-store staples like handbags already went into effect, with the vast majority of other products slated for hikes later this year, even after a partial reprieve.

J.C. Penney is among the retailers exposed to the U.S.-China trade war as the critical holiday season approaches. The retailer in June sent a letter to the Office of the U.S. Trade Representative explaining how its core customers -- middle-class working women -- would bear the brunt of the proposed tariffs. Still, it said on a conference call that its sourcing in China is already lower than apparel industry averages.

J.C. Penney sees comparable sales will be down 7% to 8% for the full year. But Chief Financial Officer Bill Wafford said that guidance did not include possible impacts from the latest round of China tariffs.

The company expects liquidity to be at least $1.5 billion for the remainder of the year, it said. Still, it has very little breathing space, Saunders said. J.C. Penney has close to $4 billion of total debt, according to data compiled by Bloomberg, including bonds, revolving loans and a term loan.

“It has enough liquidity to function for now, but it also has a big debt pile and a broken business that needs investment to fix,” he said in an email. “Those things are uncomfortable bedfellows.”

--With assistance from Katherine Doherty and Karen Lin.

To contact the reporter on this story: Jordyn Holman in New York at jholman19@bloomberg.net

To contact the editor responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net

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