I thought Ron Johnson was an excellent hire when he took over as CEO of J.C. Penney (NYSE:JCP). I never bought into the idea that he was the savior of retail, but I didn't think the company needed one. J.C. Penney just needed a change. And since he was coming from Apple, I thought his winning persona was going to be one additional asset to the company. Unfortunately, one year later, investors are still waiting for that winning formula to take shape.
How much worse can things get?
Not much was expected from the fourth-quarter report. The Street was still hoping to give JCP the benefit of the doubt in some areas. However, in every aspect, the company managed to answer: "How much worse can things get?" Same-store sales, or comps, the most important retail metric that tracts sales performance of stores opened at least one year, dropped roughly 32% year over year. This was 6% worse than Street estimates.
By comparison, for the third, second, and first quarters, comps dropped 26.1%, 21.7%, and 19% respectively. Essentially, fourth-quarter comps were 10% worse than the average loss of the previous three quarters. Johnson has been unable to stop this bleeding. And the fourth-quarter loss widened to $552 million, or $2.51 per share, compared to a loss of $87 million, or $0.41 per share a year ago.
Full-year results weren't any better. Net loss reached just under $1 billion at $985 million, or $4.49 per share, compared with a loss of $152 million last year. But excluding charges and other items related to the company's transformation, the loss narrowed to $766 million. The company has been making significant investments to redesign its stores and increase foot traffic. It doesn't seem as if these investments have paid off, however, with revenue plummeting 25% year over year.
Were expectations too high?
It seems reasonable to think that perhaps the Street was expecting much better performance from J.C. Penney. And if so, what was the cause of such optimism? Granted, the retail sector has been performing much better lately, especially discounters like Wal-Mart (NYSE:WMT) and Target. But the Street has also seen struggles from the likes of Kohl's and Sears. And it's not as if J.C. Penney had shown a strong record of performance.
It's possible that the Street was looking at recent performances from Wal-Mart, which always attracts a lot of attention. It's true that Wal-Mart did well recently, but 4% year-over-year revenue growth arrived below consensus estimates. Earnings were better than expected, but boosted by a favorable tax rate, growing 11% year over year to $1.67 per share. Still, these results were solid, given the soft macro environment. But it also underscores some missed opportunities by J.C. Penney.
Plus, Wal-Mart has an identity, which is something that J. C. Penney lacks. Customers walk into a Wal-Mart store in pursuit of getting the best possible low prices every day. Same goes for Target. While it competes with Wal-Mart in the low-price category, Target is often considered more upscale and carries designer brands that Wal-Mart may not have. And customers are often willing to pay the difference. JCP does not have such a distinctive draw, especially since its products can be found at most rival stores like Kohl's.
Johnson did say during the conference call that the company would start offering sales every week inside its stores. But I'm not certain that this will work, especially since the prior attempts failed. I'd like to think positively. But why would anyone get excited about recycled decisions? Granted, the company has to do something. And to his credit, Johnson acknowledged making some mistakes. But why go back to the pool of failed ideas?
Investors are beginning to lose patience – and rightfully so. The company was a disaster when Johnson arrived, and a case can be made that (relative to expectations) JCP is worse off today. These shares are going to remain in limbo for the next several quarters. It's going to require a strong stomach to buy this stock, and it requires more than 20/20 vision to see the glass-half-full side of this story. If these shares can stay above $15 before the first-quarter report, it would be a small victory.