J.C. Penney Soars as Sales Gain for First Time in Years

J.C. Penney Co. (JCP)’s sales are finally headed in the right direction.

The department-store chain that’s posted more than $2.5 billion in losses the past three years yesterday reported its first quarterly sales gain since 2011, sending the shares up 16 percent. While the company is still losing money, the first-quarter loss was narrower than analysts expected, and the retailer bolstered its finances with a larger credit line.

Since returning as chief executive officer a year ago, Mike Ullman has torched many of the strategies that almost sunk the century-old department-store chain during predecessor Ron Johnson’s 17-month tenure. He reversed pricing and merchandising decisions, ended a store remodeling plan and even reinstated the old logo. The moves slowed the exodus of customers who were turned off by Johnson’s bid to attract younger and wealthier shoppers.

“Ullman has stabilized this company,” said William Frohnhoefer, an analyst for BTIG LLC in New York. “The question is, ‘Can he grow it?’”

J.C. Penney shares gained to $9.73 at the close in New York. The stock has declined 48 percent in the past 12 months.

The first quarter was hard on the U.S. retail industry as abnormally cold weather and snowfall in many parts of the country weighed on sales. Wal-Mart Stores Inc. yesterday posted first-quarter sales that trailed projections, hurt by the weather, along with lower food-stamp payments and struggles to keep shelves fully stocked.

Photographer: Patrick T. Fallon/Bloomberg

A man looks at apparel at the J.C. Penney Co. store inside the Glendale Galleria shopping center in Glendale, California. Close

A man looks at apparel at the J.C. Penney Co. store inside the Glendale Galleria... Read More

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Photographer: Patrick T. Fallon/Bloomberg

A man looks at apparel at the J.C. Penney Co. store inside the Glendale Galleria shopping center in Glendale, California.

Stopped Bleeding

While Ullman has stopped the bleeding, J.C. Penney’s results are being compared to the dismal Johnson era, making them look better than they really are, said Michael Binetti, an analyst for UBS AG in New York.

Sales sank 16 percent in last year’s first quarter, coming after a 20 percent drop in the same period in 2012. This year, first-quarter sales climbed 6.2 percent to $2.8 billion, the Plano, Texas-based chain said in a statement. That topped analysts’ $2.71 billion average estimate.

Those easy comparisons will fade in the second half of this year when the company goes up against the beginning of the turnaround led by Ullman, said Binetti, who upgraded J.C. Penney’s shares to neutral from sell on May 7 because of the favorable comparisons.

“The company is still under a lot of pressure,” Binetti said before the results were released.

More Losses

Ullman’s revival of J.C. Penney’s old merchandise and business model still has yet to return the company to profitability. The net loss in the three months ended May 3 held steady at $352 million, or $1.15 a share, compared with $348 million, or $1.58, a year earlier. Excluding some items, the loss was $1.16 a share. Analysts projected $1.22.

Analysts expect the chain to rack up $1 billion more in losses this year, which may exacerbate another part of the Johnson hangover: dwindling cash.

Less than a month after Ullman, 67, returned to the job he previously held for seven years, the company took out a $2.25 billion loan and borrowed an additional $850 million from the company’s credit facility to shore up the balance sheet.

That still wasn’t enough to fund the turnaround, and in September the chain added another $786 million to its coffers through a stock offering that diluted shareholders by about 38 percent.

Cash Balance

All that fundraising, about $3.9 billion in all, only boosted the company’s cash to $1.52 billion on Feb. 1, because the company was still losing so much money. The company yesterday said it has $1.17 billion in cash and short-term investments as well as a new $2.35 billion credit facility that replaces its exiting $1.85 billion bank line. J.C. Penney repeated that it expects to have more than $2 billion in liquidity at the end of this year.

Credit-default swaps linked to J.C. Penney declined 180 basis points to 966, the lowest level since September, according to CMA, a unit of McGraw Hill Financial Inc. that compiles prices quoted by dealers in the privately negotiated market.

The contracts, which typically rise as investor confidence deteriorates and fall as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

New Shoppers

To jump-start the turnaround, the company needs to increase sales at a faster pace and with better profitability, Rick Snyder, an analyst at Maxim Group LLC in New York, said before the results. The chain has boosted revenue on the strength of customers increasing their spending when they visit a store thanks to the return of promotions. J.C. Penney hasn’t lured many more shoppers, and sales gains can only go so far until it does, he said.

The company reiterated that sales at stores open at least a year, which are considered a core measure of performance because new and closed stores are excluded, will increase at a mid-single-digit percentage rate this year. Revenue by that measure rose 6.2 percent last quarter.

J.C. Penney’s board, including activist investor William Ackman, brought on Johnson in November 2012. He came with a glowing resume after being credited with helping Steve Jobs create Apple Inc.’s retail operations. That came after he aided the transformation of Target Corp. from a regional chain competing on price to an upscale discounter offering fashionable goods across the U.S.

Free Rein

The board gave Johnson free rein to make sweeping changes, and he revamped nearly every aspect of the chain. While his strategies of reducing discounts and overhauling merchandise were what many thought the stodgy chain needed, the execution proved disastrous.

Shoppers disappeared in the absence of promotional events. On top of that, many of the new brands, such as Joe Fresh, were aimed at younger shoppers and missed the mark with J.C. Penney’s middle-age core customers.

“Ullman was handed a very tough job, and he’s done reasonably well,” Binetti said. But “they are far from being out of the woods.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Kevin Orland, John Lear

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