While J.C. Penney (OTC:JCPN.Q) often gets lumped in with other struggling retailers, the chain has made major progress on its turnaround efforts.
That does not mean it's not struggling. The chain saw a slight drop in net sales in Q1, down year-over-year to $2.7 billion from $2.8 billion, with comparable-store sales falling 3.5%.
Those results, however, only tell a small piece of the story. J.C. Penney is not all the way back, but it has been making all the right moves to first ensure survival, and then deliver success. This won't be a short road, but it's one with a lot of milestones and checkpoints. The retailer isn't following a quick fix strategy or expecting any one single move to reverse its fortunes. Instead, it's following a model that has helped Best Buy (NYSE:BBY) go from endangered to successful. That process involves making lots of small tweaks, doubling down on what works, and looking for opportunities created by the struggles of other retailers.
What is J.C. Penney doing?
While likely doomed Sears (NASDAQ:SHLDQ) has been focusing on shedding assets to stay alive, J.C. Penney has been making lots of small changes. The biggest of these is going into the appliance business, specifically targeting markets its rival has abandoned. In addition, J.C. Penney has been selectively going into the home services business, another area where Sears has given up market share.
Along with those big changes, the retailer has made a number of other smaller moves. These include things like improving its in-store salons and adding year-round toy stores to all of its locations after testing the concept during the 2016 holiday season. CEO Marvin R. Ellison touched on some of the other in-store and digital changes the company has made in his remarks in the company's Q1 earnings release.
"The recent sales trends, combined with the improvement in women's apparel and our growth initiatives led by Sephora inside JCPenney, jcp.com and major appliances, provide us with the confidence to maintain our sales guidance for the full year," he said. "Additionally, our investment in pricing and merchandising systems allowed us to deliver a 10 basis point increase in gross margin over last year, in light of the growth in appliances and e-commerce."
Essentially J.C. Penney has made a lot of little bets and then built on those when they work. The chain has proven demand for its new women's apparel lines, and it has shown that store-within-a-store concepts like Sephora and its salons can drive traffic by giving people a reason to leave their homes.
Those changes, plus a careful effort to control expenses, will slowly bring the company back. Again, that may not be a glamorous model, but it's what worked for Best Buy, and it's working for J.C. Penney.
What's next for J.C. Penney?
It's going to be a grind for the retailer. The company has been very realistic in its expectations and reaffirmed its full-year guidance in the Q1 earnings release. The chain expects comparable-store sales to finish the year between -1% and +1%, while gross margin will improve by 20 to 40 basis points.
These are reasonable goals which the company has been delivering upon. J.C. Penney isn't Sears hoping that some unspecific magic bullet will save its business. Instead, it's a retailer calmly adapting to a changing market, seizing upon opportunity, and testing to see what works. Ultimately that strategy will result in a much-stronger company set up for long-term success.