J.C. Penney Loss Widens as New CEO Ullman Starts Changes

J.C. Penney Co.’s net loss widened in the first quarter as the department-store chain works to rebound from former Chief Executive Officer Ron Johnson’s failed makeover.

The loss expanded to $348 million, or $1.58 a share, in the quarter ended May 4 from a deficit of $163 million, or 75 cents, a year earlier, the Plano, Texas-based retailer said yesterday in a statement. Excluding restructuring and management transition costs, the loss was $1.31 a share.

CEO Myron Ullman, who took the position back from Johnson last month, has been increasing promotions to revive sales and raising cash by borrowing $850 million from the company’s credit line while pursuing a $1.75 billion loan. J.C. Penney said last week that first-quarter sales declined 16 percent to $2.64 billion, trailing analysts’ estimates, because of disruptions from renovations and previous pricing strategies.

“The loss was a little worse than I expected, but this story isn’t about this quarter, it’s about looking out,” Rick Snyder, an analyst for Maxim Group LLC in New York, said in an interview. Ullman is “taking the right steps. He’s trying to get the customer back, and the way to do that is discounting and couponing again,” said Snyder, who has a hold rating on the shares.

J.C. Penney fell 3.6 percent to $18.12 at 10:05 a.m. in New York. The shares had declined 4.7 percent this year through the close of regular trading yesterday, compared with a gain of 16 percent for the Standard & Poor’s 500 Index.

Laundry List

Ullman ticked off a list of things he’s changing in his first public comments since returning to J.C. Penney on April 8. Primary among them is Johnson’s decision to stop selling some of the retailer’s private-label brands. The company will be bringing back as many as four of them for the fourth quarter, he said in a conference call with analysts. The chain also will return more basic clothing and sizes to stores.

Declines in purchases of its private-label goods were largely responsible for sales cratering under Johnson, Ullman said. As a case in point, revenue from Sephora, a cosmetics unit of LVMH Moet Hennessy Louis Vuitton SA, in J.C. Penney stores increased last year, he said. Meanwhile, total sales sank 25 percent.

Johnson’s Shops

The CEO didn’t rule out continuing to add what Johnson called “shops” in the future, although no new ones would be introduced this year, he said. The chain is completing renovations to home sections in about 500 stores in what will probably be the last part of Johnson’s vision to be implemented.

Ullman also pointed out that he had a similar strategy during his first stint as CEO that ended in November 2011 to make way for Johnson. Under Ullman, J.C. Penney added areas dedicated to brands such as Sephora and Mango.

“I was probably three or four years ahead on that topic,” Ullman said. “I didn’t call it a shop. It’s a presentation.”

J.C. Penney also needs to revamp its website to make the inventories sync up with what’s in the stores. Customer service has to be improved as well, Ullman said. There’s nothing structurally wrong with the company that won’t allow it to win back customers and become profitable again, he said.

Under Johnson, J.C. Penney’s operations consumed $10 million in cash last year, the first time it has used cash since at least 1987. That trend continued in the first quarter, when they consumed $752 million in cash after using $577 million a year earlier because of declining sales and spending on renovation.

Gross Margin

The retailer’s gross margin, the percentage of sales left after the costs of goods sold, narrowed to 30.8 percent from 37.6 percent in the same period a year ago, hurt by lower-than-expected sales and a higher level of clearance sales. J.C. Penney’s gross margin sank to 31.3 percent last year, the smallest in a decade.

The decline illustrates the challenge Ullman faces in trying to win back customers who were alienated after Johnson, the former head of Apple Inc.’s retail stores, removed promotions and swapped in new clothing aimed at younger women. The chain released commercials this month saying it learned from its mistakes and thanked customers for giving it another chance.

J.C. Penney also is returning to its promotional roots. Last week, for its Mother’s Day event, it used the term “doorbusters” to advertise in-store savings of as much as 40 percent. That kind of discounting was exactly what Johnson wanted to eliminate. Retailers traditionally used doorbusters during the Black Friday shopping weekend after Thanksgiving that is known for large discounts. The company will continue to spend on marketing events like that about 20 times a year, Ullman said.

Sales Miss

Whether the strategies will work remains to be seen. The first-quarter sales -- announced in preliminary results last week so Goldman Sachs Group Inc. could use the information to arrange the $1.75 billion loan -- trailed analysts’ $2.73 billion average estimate. That was a slower decline than the 28 percent drop in the fourth quarter.

The company also said it had $821 million in cash at the end of the quarter, down from $930 million at the end of the fourth quarter. The company repeated those figures yesterday.

The loan arranged by Goldman is expected to close on May 22, according to a public filing. That is dependent on J.C. Penney extinguishing $254 million of its 7.125 percent bonds due in 2023 because the added debt would break a covenant.

On May 14, J.C. Penney boosted a tender offer for the securities to 145 cents on the dollar after an initial 135-cent proposal. A peak price of more than 150 cents may be needed, according to Covenant Review LLC. Whatever the retailer spends on retiring the bonds will be taken from the Goldman loan.

Wal-Mart Results

Competitors reporting results yesterday included Wal-Mart Stores Inc. The world’s largest retailer declined after forecasting second-quarter profit that was less than analysts estimated as the slow U.S. economy and higher taxes put pressure on consumers.

Earnings per share will be $1.22 to $1.27, the Bentonville, Arkansas-based company said yesterday in a statement. Analysts projected $1.29, the average of 24 estimates compiled by Bloomberg. Sales in the fiscal first quarter ended April 30 trailed analysts’ estimates while profit matched projections.

Nordstrom Inc. dropped after the department-store chain posted first-quarter revenue that trailed analysts’ estimates and cut its sales forecast for the year.

Revenue increased 4.7 percent to $2.75 billion. Analysts had estimated $2.81 billion on average. Sales at stores open at least a year will rise as much as 5 percent in the current fiscal year, Nordstrom said. In February, it projected a maximum of 5.5 percent.

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