JC Penneys “key priorities” moving forward include merchandise, omni-channel and marketing

JC Penney's “key priorities” moving forward include merchandise, omni-channel and marketing

JC Penney has emphasised its commitment to moving back to a merchandising model marked by narrow and deep assortments, as it looks to build on the momentum created to date from its turnaround strategy.

The US department store retailer yesterday (14 August) showed its strategy appears to be paying off after revealing a lower second-quarter net loss and higher sales.

The group launched its transformation programme in January 2012 as part of ongoing efforts to turn around the business. The two main issues identified were the company's pricing and promotional strategy, and the shopping experience offered to customers.

CEO Mike Ullman has been relatively open about JC Penney's "mistakes of the past", through which the company's prior merchandising and promotional strategies failed to work.

Under previous CEO Ron Johnson, the idea was that by focusing on everyday low prices instead of promotions, in-store boutiques, and replacing private labels with new brands, new life would be breathed into the retailer.

This, however, was not the case, and instead resulted in a fall in traffic, plummeting sales and shrinking margins.

In August last year, Ullman admited there were "no quick fixes to correct the errors of the past", but the retailer has been working hard to turn the business around.

Speaking on the firm's earnings call yesterday, CFO Edward Record said JC Penney's "key priorities" moving forward will focus on merchandise, omni-channel and marketing.

Merchandise model
Regarding merchandise, Record told analysts the retailer is moving back to a merchandising model marked by narrow and deep assortments.

"There are three pillars for our merchandising strategy; offering powerful private brands, sought-after national brands, and exclusive attractions that can only be found at JC Penney."

Record said the restoration of key private brands has been "fundamental" to its turnaround, with brands such as St John's Bay, JF, J Ferrar, Ambrielle and Xersion all continuing to outperform.

"We believe private brands like these are key to JC Penney's growth. They not only give customers style at a price that fits their budget but at margins that are 300 to 600 basis points higher than other brands."

Additionally, Record highlighted the "critical importance" of its partnerships with leading national brands.

"Brands like Nike, Carter's, Maidenform, Izod, and Van Heusen are performing very well in our stores and on JCPenney.com. Exclusive attractions like Sephora, Liz Claiborne and Royal Velvet also continue to be important growth drivers for us."

Record also pointed to opportunities around kids and home, noting that the former has had "a very tough spring".

"We expect that to turn around as the new management team came in early this spring and their first impact is really fourth quarter. We think there is opportunity there. And we have opportunities around footwear and handbags as well that we've got a new management team in there going after right now."

Strategy cornerstone
Another growth opportunity for JC Penney is in omnichannel, the finance chief told analysts.

"We are committed to being a retail leader in this area. JCPenney.com, which is a cornerstone of our strategy, continued to perform very well in the second quarter, as it has throughout most of the turnaround. Our .com growth is generated not only by increased traffic and average order value on jcp.com itself, but also from the growth of .com orders that originate in our stores."

Steady recovery
First signs of a turnaround in the business came in May, when the company recorded its first quarterly rise in total sales since May 2011.

Record told analysts he felt good about where the company is and suggested he was happy with the pace of recovery.

"Obviously we wish the sales came back faster, but I think once you break that habit of the customer, where they go, you have to earn them back like every other customer. We have a little bit of tailwind in that, but it's not as easy as just putting back the merchandise that you had and they're going to come back, we all realise that. It continues to be a fight out there in a very competitive environment, but I think we're winning market share and our results show that."

Record said the company would offer more details as to how JC Penney can expect to continue this sales growth at its Analyst Day in October.

"We know that we can't run in the flat to 2% comp range, we need to stay in the mid-single range as we move forward to get back to where we were and we have plans to do that."

Record added that details would also be revealed in October on the initiatives it plans to spend its capex on, which is expected to be in the $250m to $300m range in the next year.

"Omni-channel continues to be a big opportunity for us but also a big investment, and we have some other merchandising initiatives that we plan on rolling out next year that we think can really add to both the top line and bottom line of the company."

Despite the group's optimism, analysts have offered a more cautious view of JC Penney's long-term recovery.

UBS Global Research analyst Michael Binetti noted that the path to sustained free cash flow will require several years of positive same-store sales growth.

"2Q was JC Penney's best same-store sale/gross margin combo since the recovery began. That said, we believe attention turns to whether JC Penney can sustain +MSD (positive Mid Single Digit) same store sales (SSS) beyond the benefit of lapping 1x disruptions (home construction, merchandise miscues, elevated clearance) - especially since store traffic remains negative and 2Q SSS decelerated for the 1st time to +6% from +7.4% in 1Q."