Last week, Macy's (NYSE:M) and J.C. Penney (OTC:JCPN.Q) both reported uninspiring results for the second quarter of fiscal 2019. Macy's barely achieved a seventh consecutive quarterly increase in comparable-store sales -- and did so at the expense of its profitability. Conversely, profitability improved at J.C. Penney, but sales plunged 9% year over year.
Shares of both retailers have lost more than half of their value over the past year. Macy's stock now trades at its lowest level in nearly a decade, while J.C. Penney shares have fallen into penny-stock territory and recently touched a new all-time low.
That said, executives at Macy's and J.C. Penney believe they can turn things around. Here are some of the highlights from their remarks on the retailers' earnings calls last week.
Macy's will focus on costs, inventory management, and improving its best stores
Excluding asset sale gains, Macy's adjusted EPS fell 40% year over year in the first half of fiscal 2019, despite flattish sales. Management expects to drive much better earnings results in the second half of the year and beyond, regardless of how sales trends develop.
Better inventory management is one critical component of the turnaround plan. Macy's entered the second quarter with too much inventory, and weak sales during May and early June forced it to take deep markdowns to clear out unwanted seasonal merchandise. Macy's ended Q2 with a much healthier inventory position and it has planned far more conservatively for the fall. This should enable it to avoid a repeat of the margin-sapping discounts that hurt it last quarter.
Additionally, CFO Paula Price highlighted some longer-term initiatives to improve inventory management using new technology tools and enhanced data analytics capabilities.
Macy's is also looking to reduce its expenses to offset the permanent margin headwinds it faces from rising shipping costs related to the growth of its e-commerce business. Management didn't spend much time talking about the opportunity here -- other than hinting that it is significant -- but promised more details in a presentation next month.
Lastly, CEO Jeff Gennette acknowledged that comp sales will continue to decline for Macy's "neighborhood stores," which comprise, roughly speaking, the lower-performing half of its store fleet. Yet these stores have become more profitable according to Gennette, due to efforts to operate them more efficiently. Meanwhile, Macy's is directing the vast majority of its physical store investments to its flagships and top 150 nonflagship locations, which together account for well over half of its brick-and-mortar sales. Macy's investments are driving better sales trends in these stores.
J.C. Penney wants to excite customers again
For the past several quarters, the opportunity to improve gross margin through better inventory management and reducing shrink -- the industry term for lost and stolen merchandise -- has been a key theme during J.C. Penney's earnings calls. J.C. Penney followed through last quarter, as gross margin improved by more than 3 percentage points year over year. That enabled the company to reduce its net loss by more than 50% compared to Q2 2018.
That said, comp sales tumbled 6% year over year, excluding the impact of J.C. Penney exiting the appliance category and ending in-store furniture sales. There's little chance of a return to sustainable profitability without a sales turnaround.
During last week's earnings call, new CEO Jill Soltau gave investors the first real hints about how her team hopes to get J.C. Penney growing again. The defining feature of the strategy is that management wants to make JCPenney stores an exciting place to shop again.
Under former CEO Marvin Ellison, the in-store environment was somewhat neglected as J.C. Penney tried to diversify into new product categories like appliances. Soltau and her team plan to change that by decluttering stores, installing more inviting merchandise displays, and offering more individualized style advice. J.C. Penney will also revamp its marketing strategy to support the changes it is making to its stores.
Should investors believe the hype?
Of course, the key question for investors is whether the turnaround strategies described by Macy's and J.C. Penney executives are realistic. Both companies have missed their own targets plenty of times in recent years.
Macy's looks like a very good turnaround bet right now. Undoubtedly, some of management's initiatives won't pan out, but the company has a lot of levers to drive a return to earnings growth. Importantly, Macy's has plenty of room to expand proven initiatives like renovations of its best stores, adding Backstage off-price sections to its full-line stores, and closing underperforming locations. It also has a ton of underutilized real estate that it can sell to pay down debt.
The turnaround case for J.C. Penney is far more speculative. The company is drowning in debt, sales are still plunging, and it has more work to do just to reach breakeven. Moreover, it could be challenging for the iconic department store chain to shake off its stodgy image. Though management has some good ideas, only time will tell whether they're enough to save J.C. Penney.