During the past few years, J.C. Penney (JCPN.Q) has made its home department the centerpiece of its plan to reinvigorate sales growth. This strategy was designed in part to take advantage of Sears Holdings' (SHLDQ) rapid decline. Most notably, J.C. Penney re-entered the major appliance market -- a key area of strength for Sears -- in 2016.
This growth strategy had a significant positive impact on sales at J.C. Penney during 2017, and the home department is likely to continue making an outsized contribution to the company's sales growth in 2018 and beyond.
Another successful year in the home department
J.C. Penney's recently released annual report indicates that the home category was the strongest part of its business last year. While J.C. Penney's overall comparable sales inched up just 0.1% in 2017, the home department helped offset a decrease in apparel sales, particularly in the first half of the year.
The importance of the home department can be seen from changes in the company's overall merchandise mix. Home accounted for 15% of the company's sales in 2017, up from 13% a year earlier and 12% in 2015. Indeed, J.C. Penney achieved double-digit sales growth in the home category during 2017, and growth of more than 20% over the past two years combined. (Rounding in the company's annual report makes it impossible to be more precise.)
Appliances are key, but that's not all
J.C. Penney's appliance initiative was a big part of the home department's growth last year. For example, in the second quarter, appliance sales contributed nearly 300 basis points of comp sales growth, indicating a year-over-year sales increase of more than $80 million just in that quarter. In the third quarter, appliance sales more than doubled year over year.
A few key factors drove this growth. Early in the year, J.C. Penney opened about 100 additional appliance showrooms, bringing its total to roughly 600. Furthermore, it introduced an important new brand (Frigidaire) to its assortment in October. Lastly, J.C. Penney benefited from a full year of sales in appliance showrooms that opened in mid-to-late 2016.
The external environment also supported J.C. Penney's efforts to grow its appliance sales last year. Appliance and electronics retailer HHGregg closed all of its stores last spring. Meanwhile, Sears Holdings' revenue plunged 25% in fiscal 2017, with appliance sales performing only slightly better than the company average.
Yet appliance sales weren't alone in driving growth in the home department during 2017. In fact, during the fourth quarter, while appliance sales surged more than 30% year over year, comp sales rose almost 60% in mattresses and nearly 40% in furniture.
These merchandise categories are another two areas in which J.C. Penney can gain market share at Sears' expense. To capture these opportunities, J.C. Penney dramatically increased its furniture selection online during 2017, while expanding its mattress assortment in more than 300 stores.
J.C. Penney isn't done yet
Outsized growth in J.C. Penney's home department should continue in 2018 and beyond. The company plans to add new brands to its appliance assortment during the year, enabling further growth. It may also consider opening smaller appliance showrooms in stores that don't have enough space for a full appliance section.
Continued store closures at Sears will also help J.C. Penney's appliance business. It's important to note that despite all of its struggles, Sears still sold about $2.7 billion of appliances last year. That represents a huge sales opportunity if Sears ultimately liquidates in the next few years.
Additionally, J.C. Penney will benefit from a full year of the initiatives that drove strong growth in furniture and mattresses during the fourth quarter. It even added TVs to its home department last fall due to customer demand.
During 2016 and 2017, weak results in much of J.C. Penney's apparel business offset the benefit of strong growth in the home department. If apparel sales are now set to return to growth -- as management has predicted -- then 2018 could be a great year for J.C. Penney.