5 Things J.C. Penney Company's Management Wants You to Know

Five key investing takeaways from the department store's second-quarter conference call.

Aug 19, 2014 at 10:30AM

Images

Sunny days ahead for the department store retailer.

A year ago analysts were debating how long it would be before J.C. Penney (NYSE:JCP) finally succumbed. The department store chain was issuing press releases denying media reports that its financing had been cut off, and the back-to-school season was seen as a last-ditch effort to save the company. If it couldn't generate sufficient sales, the writing was on the wall and investors could start looking for burial plots for the company.

Fast-forward 12 months and analysts were tripping over themselves during Penney's second-quarter conference call last week to heap superlatives on the remarkable performance it delivered. No longer a fluke or a one-off, the retailer is proving it's truly on a turnaround that is gaining traction.

Screen Shot

Data: J.C. Penney SEC filings.

Penney posted quarterly revenue of $2.8 billion, a 5% increase from last year; though still recording net losses, at $172 million they're sharply narrower from 2013 when it saw well over $500 million in red ink.

Here are are five takeaways management thinks you should be particularly aware of going forward.

Sephora relationship continues to pay dividends
Filling in for CEO Myron Ullman, who was recovering from a surgical procedure, Penney Executive Vice President and CFO Edward Record said the retailer's exclusive arrangement with personal beauty care specialist Sephora continues to pay dividends.

Nearly half of Penney's 1,060 stores now feature a Sephora outlet. As it has rolled out boutiques to additional stores while expanding others, they continue to drive more customers in the door. Sephora revenues were up over 25% in total, but more important, rose 11% in stores opened at least one year.

Images

Beauty may be in the eye of the beholder, but Sephora's ability to drive customer traffic is a thing of beauty for J.C. Penney.

The back-to-school season was a defining moment for Penney in 2013, and this year it represents an opportunity to cement the company's recovery. As Record highlighted during the conference call, "sales were strong during the final weeks of the (second) quarter, which represent the beginning of the critical back-to-school shopping season," and Sephora will be a key part of keeping the momentum going. 

Online sales will also be a key driver of more traffic
Traffic trends are still negative, and both Macy's (NYSE:M) and Kohl's (NYSE:KSS) have recorded similar difficulties, indicating an industrywide problem and not something specific to Penney. However, the company was able to show stronger numbers sequentially from the first quarter, and its omnichannel marketing strategy will be an important component of seeing those numbers turn positive.

Website traffic was up by double-digits for the quarter, improving 16.7% to $249 million. During the conference call, Record called the website "a cornerstone of our strategy" for recovering its standing with consumers.

Penney's online site skews heavily toward sales from its home department, which has been lagging. In fact, 30% to 40% of the online business is in home, compared to only 15% in the stores. With homewares still needing care and feeding, this could represent another big opportunity.

Just how big home could be
As sickly as the department has been, the in-store home business was up over 25% from the prior year and contributed roughly 200 basis points to the retailer's comp improvement. A lot of Penney's problem with home, however, was that much of what was being sold was clearance merchandise, particularly in furniture. Now J.C. Penney is focused on getting them to historical levels as a percentage of revenues, which portends improvements elsewhere on Penney's profit and loss. 

G

Home is where is the heart is, and where Penney's next growth spurt could come from. Photo: J.C. Penney.

The company a year ago began an overhaul of the home division, realizing the anchor it had become. As Record noted in the conference call: "Even in the months up against the relaunch, it comped positively. So we feel good about home." 

Margins continue to improve, and there's room for more growth
Because Penney significantly reduced clearance items from inventory -- a move separate from its restoration of the regular sales demanded by customers -- it was able to improve margins. 

Gross margin jumped 640 basis points in the quarter to 36% of sales as clearance items came in at less than 15% of the total sales. As that is in line with its historical averages -- Penney isn't looking for zero clearance, just typical run rates -- the retailer expects the trend to continue next quarter with a 650-basis-point improvement in gross margin.

Jferrar At Jcpenney

It's a private affair with Penney's private label goods like J. Ferrar boosting margins. Photo: J.C. Penney.

Equally important as reducing its level of clearance goods has been the return of private label apparel such as St. John's Bay, JF, J. Ferrar, and Ambrielle. These lines not only give customers clothes within their budgets, but do so at margins that are 300 to 600 basis points higher than other brands, which is why Record said in the conference call that the "restoration of key private brands has been fundamental to our turnaround."

Private labels couldn't help the kids department
Despite the strength in Penney's partnership with Disney (NYSE:DIS) in the kids department, that segment remains well behind where it should be. There have been a lot of improvements made this year, but the benefits take time to become tangible. 

Record acknowledged that the team he had working in there was miserable at sourcing clothes and driving private label sales, but the department has been cleansed, hopefully in time for the Christmas season. The kickoff of back-to-school seems positive thus far, according to the CFO, "so we expect to see Q3 some of that impact and really to be in a decent place by the time we get to holiday in where we want to be in kids."

Foolish takeaway
Sales are up, margins are improving, losses are dwindling, customers keep coming back, and Penney is taking market share away from its rivals. A year ago analysts were biting their fingernails over its imminent demise, while today they're rightfully backslapping the executives who engineered this turnaround despite all the criticism and doomsaying.

Although there was some hefty optimism built into its stock price a year ago, which accounts for shares selling 30% below where they were back then, I'd say that just means this retailer today offers a superb discount to investors.

A company in turnaround mode is still a risk, and obviously not everything has gone as J.C. Penney has planned. But I'd hazard a guess that this once-venerable retailer is out of the woods at this point and that we'll continue to see it build on the gains that are now on the books.

Will department stores be the place where you buy your technology from in the future?
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers