J.C. Penney (JCPN.Q) got a surprising bump after its third-quarter earnings report Friday.
The stock jumped as much as 11.8% after its earnings release that morning and finished the day up 6.4%. The move came even as comparable-store sales plunged 9.3% in the quarter, in part because of the retailer's recent decision to stop selling appliances and furniture.
But the company did show some positive signs as gross margin increased 350 basis points to 35.4%, and it lifted its adjusted EBITDA guidance for the year from a range of $440 million to $475 million, to at least $475 million. Management also said the company would be free-cash-flow positive for the year, reassuring investors that the business itself is at least able to tread water right now.
Image source: J.C. Penney.
The challenges facing J.C. Penney are self-evident. The entire department store model has been threatened by e-commerce. The chain itself has been hollowed out by years of mismanagement, declining sales, and losses, and the company faces a steep debt burden of more than $4 billion, making it difficult to raise the cash necessary to mount a turnaround and forcing it pay hundreds of millions of dollars annually in interest expense.
CEO Jill Soltau, who took the helm of the struggling retailer a little more than a year ago, is about to face her biggest test yet heading into the holiday season. On the recent earnings call, Soltau outlined a few of the ways she's trying to drive a turnaround. Let's take a closer look.
1. A return to visual merchandising
What was notable during the era of Marvin Ellison -- the CEO prior to Soltau who left suddenly last year to join Lowe's -- was his turn away from J.C. Penney's traditional strength in apparel to launch appliances and other home-improvement lines. Soltau has done away with that strategy and is emphasizing visual merchandising -- the practice of designing stores and floor plans to attract customers' attention and coax them to purchase items by presenting them in an appealing fashion. "Through our research," Soltau said, "we know that visual merchandising coupled with proper inventory management and, of course, the right product creates an emotional connection with the customer, which is another step to driving traffic and sales."
Soltau said the company had expanded a visual merchandising test to 92 stores, a sign that the company sees it as a valuable lever. It plans to study those results and refine its strategy accordingly.
2. Counting on the all-in customer
Several times on the call, Soltau referenced the "all-in shopping enthusiast," who appears to be the customer J.C. Penney is most focused on in its turnaround efforts. She described this customer as "most willing to invest the time and money to get it right." In other words, these are the shoppers committed to taking the time and effort to visit stores to get what they want, making them less likely to be lost to Amazon.com or another online competitor.
Soltau added that the all-in shopping enthusiasts like the mall, but they aren't loyal to one store or brand, and they represent one quarter of all retail home and apparel sales.
Getting back the all-in shopper may also be key to turning around J.C. Penney's word-of-mouth marketing, which would help lift customer traffic, since the company's brand has suffered in recent years. Management is hoping that its visual marketing and e-commerce strategy (since 90% of customers begin their path to purchase online) will deliver it a greater wallet share of the all-in shopper, creating a halo effect for the rest of the business.
3. Launching a new "brand defining" store
Earlier this month, Penney opened up its new "brand defining" store in Hurst, Texas, which features clothing curated according to purpose, with categories like "Shine" for special occasions and "All Day" for casual workwear and weekend wear. It also has two styling rooms, a movement studio with instructor-led classes, 11 lounges, and a new Shutterfly selfie studio.
On the call, Soltau was careful to stress that the new store is not a prototype or a flagship, saying that it is instead a lab for the company to experiment, test out new initiatives, and to inform its changing strategy. Still, the features in the new store make clear that Soltau is leaning heavily on in-store experiences and making the stores attractive places to visit in order to revive the brand.
Will it pay off?
Getting back to basics and focusing on things like experiences and high-value customers are smart moves, but there are a number of factors outside of the company's control that could derail Soltau's experiment, including a recession or further decline in mall traffic due to vacancies from its peers, many of whom are also struggling.
Considering the market's treatment of department store peers like Macy's recently, investors are unlikely to reward Penney without some significant improvements in the underlying business. Watch the holiday quarter, including metrics like comps and gross margin, in addition to progress with the initiatives above. Ultimately, the company will have to take steps toward full-fledged profitability in order for the turnaround and the stock to be a success.
