5 Key Things J.C. Penney Needs You to Know

J.C. Penney CEO Marvin Ellison. Image: Penney.

The retail industry is going through a huge upheaval, and even though discount retailer J.C. Penney (JCPN.Q) has started to show signs of a turnaround, investors are still nervous about its future prospects. With the holiday season upon us, CEO Marvin Ellison and his executive team discussed Penney's most promising opportunities as well as how the company plans to overcome its many challenges. Let's look more closely at how Ellison intends to take J.C. Penney to the next level.

1. Increasing the company's online capabilities

We have three large dot-com distribution centers strategic located with approximately 5 million square feet of space. Our new omnichannel and supply chain leadership teams are now taking steps to effectively digitize these centers to create a seamless connection between our digital and brick-and-mortar customers.
-- CEO Marvin Ellison

Ellison has made it his primary mission to get J.C. Penney out of the e-commerce Stone Age by bulking up its online capabilities. The company has started testing a same-day in-store pickup program for online orders in certain key markets, and it has generated solid results so far. Moreover, improvement in its mobile app suggests that Penney is making progress, and that should help it continue to build up comparable sales as it builds momentum.

2. Sephora is key to driving traffic and will continue to be

Sephora attracts a younger demographic to J.C. Penney and gives us an opportunity to expand our brick-and-mortar and digital offering to this all-important millennial customer.
-- Ellison

As we've seen in recent quarters, the Sephora store-within-store concept has been a huge success for J.C. Penney. Ellison sees Sephora not just as a driver of traffic and sales but also as a way for Penney to differentiate itself from Macy's (M -0.45%) and other similar department-store retailers. In particular, Penney, Macy's, and other retailers have all faced the challenges of appealing to younger customers. Developing the omni-channel is an essential part of connecting to millennials who rely almost entirely on mobile devices, but Penney also wants to give millennials reason to come into its stores. Sephora has done that so far, and Penney thinks it will continue to do so.

3. Cost-cutting remains necessary to return to profitability

We remain committed to permanently reducing costs and running a leaner and more effective organization without impairing our ability to grow the bottom line.
-- CFO Ed Record

Even though Penney was pleased with its 6.4% rise in comparable-store sales, CFO Ed Record knows that the retailer will have to work even harder to return to profitability. Much of the improvement on Penney's bottom line recently has come from its efforts to keep costs under control, and the company managed to cut its overhead expenses by $41 million during the quarter, bringing year-to-date savings to almost $150 million. In the future, continued smart practices with advertising spending as well as strategic decisions like its recent job cuts in its corporate office should keep the savings flowing and boost J.C. Penney's profitability in the long run.

4. Reducing the pension risk to aid company focus

We recently announced a series of pension transactions that materially reduced the company's pension obligation by $1.25 billion to $1.75 billion.
-- Record

Another action that Penney took had to do with its pension plan. In a growing trend across multiple industries, many employers have looked at reducing risk from pension obligations by paying insurance companies to take on that risk for them. The move comes with an upfront cost, which Penney expects to take as a charge against earnings in the fourth quarter. Yet the net effect is to reduce the volatility that can result from changing assumptions required by pension law. By taking some of the risk of covering employee pensions off the table, Penney can focus more on its core business.

5. Penney is prepared for the holiday season

We are very pleased with our plan for holiday, and we know that the fourth quarter will really be defined by the period of shopping starting at Thanksgiving through the day after Christmas.
-- Ellison

In retail, the holiday season is everything, and Ellison is happy about the gift-giving categories that its merchant team has established. Learning from past mistakes, Penney has made sure its inventories will be adequate to cover demand, avoiding the embarrassment of not being able to offer certain products for shoppers who've taken the time to come into the store. With consumers in Penney's key demographic enjoying favorable economic conditions, the department store sees potential for a great holiday quarter.

Penney has investors excited about the coming holiday season. If the retailer can keep up its positive momentum even with rivals like Macy's seeing tough conditions ahead, then Penney's stock has plenty of room to keep rising in the future.