JC Penney is executing against some plans to grow gross margin

JC Penney is executing against some plans to grow gross margin

US department store retailer JC Penney has said it will continue to focus on enhancing the efficiency of its supply chain as one of a number of levers to help drive gross margin improvement.

The retail group saw a 100 basis point improvement in its gross margin in the second quarter, at 37% of sales, and for the spring season, an improvement of 220 basis points. It is forecasting gross margin for the full year to increase 100 to 150 basis points.

In order to drive this further, CEO designee Marvin Ellison told analysts on JC Penney's recent earnings call that the group is executing against some plans to grow gross margin in three ways.

"We are encouraged by this progress, but we know we can do more," he said. "We need to continue to focus on enhancing the efficiency of our supply chain, which will be a key component of our ongoing gross margin improvement and this will be a priority of our new supply chain leader Mike Robbin."

The ex-Target Corp senior vice president of global supply chain was appointed earlier this month to take on the same role with JC Penney. His remit will be to help create seamless inventory networks that support the group's omni-channel growth strategy.

Secondly, Ellison said the focus will be on private brand penetration and efficiency. "We know that these brands provide excellent style, quality and value for customers as well as deliver gross margin above our national brands," he explained.

"Next, we’re stepping up and starting to reap benefits from the investments we made years ago in Oracle systems. These systems are designed to enable our teams to better merchandise into our stores and distribution centres and optimise our sizing, merchandising planning, localisation of our assortments. As we move to more selling seasons and build on a history, these tools will only become more useful and more powerful resulting in fewer markdowns as we end each season."

Omni-channel

JC Penney had appeared to be turning a corner following a lowering of third-quarter losses in November and improved comparable sales in January, but booked a loss of US$59m in its March quarter. In its latest quarter, ended 1 August, the retailer narrowed its net losses to $138m, and grew comparable sales by 4.1%.

In March, Ellison emphasised one of the biggest opportunities for incremental growth in the near term was omni-channel. Speaking to analysts on the retailer's most recent earnings call, he reiterated this focus, admitting that JC Penney is "behind the retail industry" in this strategy.

"We are committed to become a world class omni-channel retailer. We understand the change in dynamics of the retailer, we also understand that attempting to recreate a pre-2011 JC Penny would not work in this new omni-channel world. Therefore we are adjusting our business model and our leadership team to compete on this new omni-channel retail landscape."

Ellison expressed his "satisfaction" with the progress being made to date, and improvements in several aspects for these capabilities.

Later this year, he said work will be undertaken in powering the retailer's buy online and pick-up in-store same-day service in several key markets, with a company-wide roll-out happening early 2016.

"We’re also going to be very aggressive in expanding our assortment online. I would argue that we have one of the most conservative assortments online of any large retailers," Ellison conceded.

"We will start to see true benefits of our omni-channel strategy in the second half of 2016. But candidly we won’t see transformational benefit until the second half of next year, and then we think that benefit will continue beyond that."

Further initiatives

Omni-channel forms part of a three-pronged growth strategy for the group, which also focuses on private brands and increased revenue per customer.

For the former, Ellison explained: "We will leverage our tremendous sourcing in private brands infrastructure to become the most efficient retailer at producing private brands with style, quality and value. Not only will this provide us with differentiation, it also allows us to grow our gross margins while limiting any potential show-rooming that could take place from pure play online retail competition."

In terms of increasing revenue per customer, Ellison said JC Penney will adjust its merchandising and services. The number of active customers it has today is 87m, a number that is unchanged from 2011. "It is our responsibility to provide better choices for these customers to increase their shopping frequency and their transaction size," he told analysts.

"This framework will allow us to allocate capital and resources to areas of the business that will simply make us a better company."

He concluded: "Although there is much work to do, and we have many areas of the business that require enhanced systems and process improvements, clearly when we execute well we can deliver profitable sales and take market share."