November 9, 2012

J.C. Penney's third-quarter loss worse than expected

The Associated Press

NEW YORK – J.C. Penney Co. is hoping it has hit rock bottom.

click image to enlarge

In this Tuesday, June 19, 2012 file photo, shoppers walk in a J.C. Penney story in Plano, Texas. J.C. Penney Co. reported a bigger-than-expected loss in the third quarter on plummeting sales as customers continue to reject its move get rid of blockbuster sales in favor of everyday low pricing, according to reports Friday, Nov. 9, 2012. (AP Photo/LM Otero)

AP

The bad news keeps getting worse for the struggling department-store chain that on Friday reported a wider third-quarter loss than Wall Street expected on a nearly 27 percent drop in revenue. That marks the third consecutive quarter of big losses and sales declines as customers continue to show that they're unhappy with Penney's decision this year to ditch hundreds of coupons and annual sales in favor of everyday low pricing.

The poor results underscore the challenges facing Penney's CEO Ron Johnson, the former Apple Inc. executive who was brought in a year ago to turnaround the struggling retailer. Since then Johnson, who masterminded Apple's popular retail stores, has been working to change everything at Penney, from its stores to its merchandise.

Penney is starting to see some positive results from the makeover it began this fall of 700 of its 1,100 stores with sectioned-off shops inside each that feature different brands such as Levi's and Penney's new JCP line of casual clothes. The company said overall sales from the shops-within-stores are strong. But the continuing negative response to the company's everyday low pricing strategy has more than offset the boost.

During the third quarter, revenue at stores open at least a year plummeted 26.1 percent. That's higher than the 17.6 percent drop analysts had been expecting. Meanwhile, the number of customers coming into the store dropped 12 percent from the year-ago period.

"I expected horrific but this was worse than expected," said Brian Sozzi, a chief equities analyst for research firm NBG Productions that follows Penney.

During an investor meeting in New York on Friday, Johnson and other officials spent time assuring investors that although Penney has reported big losses, the company has enough money to finance its transformation. And Johnson, who has acknowledged for months that his plan has been more challenging than he originally thought, reiterated his confidence in his strategy but said he'd make changes as necessary to ensure success.

"Job No. 1 is to return to growth next year. Let's make no mistake about it. This is a year where we said we are willing to let the sales drop to establish a new base for the new JCP," he said Friday. "We have to return to growth."

That's the same tone Johnson has maintained since he rolled out his ambitious plan to change the way people shop. On Feb. 1, Johnson launched the pricing strategy that was designed to wean customers off the markdowns they'd become accustomed to, but that ultimately eat into profits.

He got rid of the nearly 600 sales Penney offered at various times throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, offered monthlong deeper discounts on select items and periodic clearance events throughout the year.

But as Penney's coupons and sales disappeared, so did its customers. The company recorded a big loss on a 20 percent drop in revenue in the first quarter. Seeing that as a referendum on whether customers liked the new pricing, Johnson decided to make changes.

Six months after he rolled out the plan, Johnson tweaked pricing again. On Aug. 1 — just days before Penney posted another big loss on a second straight quarter of disappointing revenue — Johnson eliminated one tier of the pricing plan, the monthlong sales.

(Continued on page 2)

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