J.C. Penney Rises After CEO Says Overhaul Is ‘On Track’

J.C. Penney Co. (JCP) rose the most in more than six months after Chief Executive Officer Ron Johnson said his overhaul of the department-store chain is “on track” amid quarterly losses and plunging sales.

J.C. Penney climbed 5.9 percent to $23.40 at the close in New York, the biggest one-day gain since Jan. 26. Before Johnson’s remarks, the shares dropped as much as 12 percent as the company posted a $147 million second-quarter loss and said it wouldn’t meet its profit forecast for the year.

Johnson, the former Apple Inc. (AAPL) retail chief who joined as CEO in November, is tweaking his pricing strategy after the previous plan confused customers by reducing sales events and coupons. Second-quarter revenue slid 23 percent to $3.02 billion, the company said today. That trailed analysts’ $3.18 billion average estimate for the lowest quarterly sales since at least 1989, according to data compiled by Bloomberg.

“I’m completely convinced that our transformation is on track,” Johnson told analysts and investors at a presentation today in New York. When unveiling plans for the overhaul in January, “we said this would be a really tough year. Somehow, I don’t think that message got through.”

Annual Forecast

On Jan. 26, the company said profit excluding some items would meet or exceed $2.16 a share this year on Johnson’s turnaround plan. The forecast topped analysts’ estimates and sent the shares surging the most since at least 1980 that day. Today, the company said it no longer expects to meet that forecast, which was reiterated in May, and didn’t provide a new projection, saying it will plan for similar trends as the past two quarters.

Investors and analysts had high expectations after the Jan. 26 presentation as Johnson said the retailer wouldn’t provide the annual forecast if it didn’t have “extraordinary confidence we could meet or exceed.” Chief Operating Officer Mike Kramer said in the same presentation the management team is “not going to commit to anything that we’re not confident we can hit.”

The fiscal second-quarter net loss of 67 cents a share compares with net income of $14 million, or 7 cents, a year earlier, the Plano, Texas-based company said in a statement. Excluding some items, the loss was 37 cents a share. The average estimate of nine analysts surveyed by Bloomberg was for a 14- cent loss.

Outlet Exit

Part of the sales decline was due to the retailer exiting its outlet business, J.C. Penney said. Sales also were hurt by a cut in marketing in July as the company adjusted its pricing strategy and outlined its back-to-school shopping strategy, J.C. Penney said.

Comparable-store sales fell 22 percent in the quarter while Internet sales plummeted 33 percent to $220 million.

The stock started to rise after Johnson’s presentation based on his conviction in the new store model and willingness to make changes, said Steven Kiel, the founder of Annandale, Virginia-based Arquitos Capital Management LLC, which holds J.C. Penney shares.

“They have plenty of cash, there’s no reason why they don’t have six to nine months to a year to actually see all of this working,” Kiel said in a telephone interview.

J.C. Penney is switching to a two-tiered pricing system of everyday low prices and clearance items and has said it would promote price matching for the first time. The previous strategy had three tiers, consisting of regular prices, monthlong sales on seasonal items and two “best prices” promotions each month, which Johnson said today was confusing.

Alienated Customers

The company is changing its marketing to focus more on the value it’s offering to regain alienated customers and will air new television advertisements in September, Johnson said in today’s presentation. Johnson last week explained the new pricing in an e-mail to 17 million customers that he said had the highest open rate of any e-mail J.C. Penney has sent.

This month, J.C. Penney’s salons are giving away at least 1 million haircuts, which normally cost $14 each, and the retailer started to implement its new store-within-store layout, he said. Johnson said he is “encouraged” by the start of the back-to- school shopping season, with August traffic down only 7 percent and sales 2 percent better than in the spring.

The company’s gross margin narrowed to 33.2 percent from 38.3 percent a year earlier as J.C. Penney recorded $102 million of markdowns to clear inventory for the back-to-school season, including exiting brands it will no longer carry.

Cash Position

J.C. Penney said it will end the fiscal year with more than $1 billion of cash following $800 million of capital spending to support the transformation and repaying $230 million of debt due this month. Chief Financial Officer Ken Hannah said the company also has a $1.5 billion asset-backed line of bank credit that it doesn’t plan to tap this year and may sell non-core assets to boost its cash position.

“I want you to understand how strong our balance sheet is,” Hannah said in the presentation with Johnson today. “Our liquidity allows us to fund this transformation out of our current operations.”

Today’s share gain may have been fueled by short-sellers seeking to cover their positions after management emphasized J.C. Penney’s strong balance sheet, Erika Maschmeyer, an analyst with Robert W. Baird & Co. in Chicago, wrote in a note.

Potential bankruptcy “has been a concern cited by shorts given several S&P credit downgrades and a recent sale of non- core assets,” she wrote. Standard & Poor’s lowered the retailer’s credit grade last month with a “negative” outlook, before the company raised $248 million by selling stock in a unit of Simon Property Group Inc. (SPG)

Short-Sellers

Short-sellers borrow stock and sell it, then attempt to profit by repurchasing the securities at a lower price and returning them to the holder.

“They really emphasized their strong free cash flow situation and liquidity,” Liz Dunn, a New York-based analyst at Macquarie Group with an outperform rating on the stock, said in a telephone interview. “There have been a lot of rumors floating around about their liquidity and whether or not they could weather this sales downturn, and I think they really put a lot of those criticisms to rest with today’s meeting.”

Johnson said in January that his overhaul of the 110-year- old retailer will take four years and reiterated today that such changes are “not a sprint.”

By the 2013 holiday season, J.C. Penney aims to have 40 store-within-stores. The plan ultimately calls for 100 of the shops, which will match the number of stand-alone specialty retail stores in many malls, Johnson said.

Executive Team

Johnson said he’s creating a new category of department store that’s different from competitors such as Macy’s Inc. and Kohl’s Corp. (KSS) called a “specialty department store.”

The CEO has revamped the company’s executive team, mainly with former colleagues from Apple and Target Corp. (TGT), where he helped develop the chain’s “cheap chic” persona. He also has announced more than 1,000 job cuts to reduce expenses and last month said 350 positions would be cut at the company’s headquarters.

The retailer said in June that then-President Michael Francis, the former Target marketing chief whom J.C. Penney hired in October, was leaving and didn’t give a reason for the exit. Johnson said at the time that he would take over marketing and merchandising efforts.

J.C. Penney has declined 33 percent this year through the close today, compared with a 62 percent gain at Sears Holdings Corp. (SHLD), an 18 percent advance at Macy’s and a 3.3 percent increase at Kohl’s.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.