The first goal of a retail company is to buy merchandise for one price and sell it for a higher price. If, and only if, a company is able to do that at an increased pace like Macy's (NYSE:M) and Dillard's (NYSE:DDS) can, that's a great reason to celebrate. This is why it's bizarre that J.C. Penney (NYSE:JCP) management and shareholders are doing the happy dance over a tiny rise in sales from inventory that the company sold at less than cost.
J.C. Penney reported its third-quarter results on Nov. 20. Overall net sales were trimmed by 5.1% to $2.78 billion. Same-store sales fell by 4.8%. Adjusted net loss was $457 million or $1.81 per share. The highlight of the report was positive same-store sales in October. For that, the company was quite proud of itself. CEO Mike Ullman stated:
Our strategies to reconnect with customers are beginning to take hold, and this became increasingly clear as the quarter progressed. This is the result of the tremendous efforts of the associates across our Company to restore the merchandise customers want and deliver an unmatched shopping experience. We are proud of the Company`s October sales performance, encouraged by the early weeks of November, and believe we are making strides toward a path to long-term profitable growth.
They are "proud" of October sales but only "encouraged" by November sales. Maybe it's because by November J.C. Penney had begun to run low of old inventory that was priced at "under cost." The continued staggering net losses are hardly anything to be excited about.
During the conference call's Q&A session, Ullman pointed out that it has been difficult for the company to "clear the merchandise." He pointed out that "some of it's had to be sold "under cost." Is there any surprise that sales tweaked up a hair with J.C. Penney selling products for less than the company paid for them in the first place? It's like selling $100 bills at a discount. Perhaps J.C. Penney should keep the champagne on ice for now.
In the conference call, the word "turnaround" was mentioned eleven times. Not a single time were any details given on what gave management the confidence that a turnaround is actually taking place except for the tiny bump up in sales in October from old inventory selling for "under cost." The most telling statement, perhaps, was when Ullman said, "Our margins are not yet improving as much as sales." Increased sales are no good if J.C. Penney, or any company for that matter, isn't making money.
It's far from impossible to make money in retail despite the economy. Macy's saw a 3.3% jump in sales last quarter along with a 3.5% jump in same-store sales. The company had healthy gross profit margins of 39.2% which seems like pie in the sky compared to some of J.C. Penney's "under cost." Its earnings per share was up 31% to $0.47. That was the 15th quarter in a row of climbing EPS. Macy's credited the success from "intensified marketing strategies."
Even Dillard's saw some growth last quarter. Overall sales grew 1%, same-store sales grew 1%, and adjusted EPS grew 18%. Its gross profit margin was almost as high as Macy's, coming in at 36.2%. Again this is mountains higher than "under cost." Dillard's expects increased sales over the holiday season compared to last year.
Foolish final thoughts
The most honest statement in the call was when Ullman said, "It's hard work with no quick fixes." Investors should take him at this word with that statement. J.C. Penney may one day turn itself around, but there's no evidence that it's done so yet. It will take more hard work, and there are no quick fixes as Ullman stated. Therefore don't expect it any time soon.
The very fact that J.C. Penney had leftover inventory to sell at "under cost" from a single quarter prior provides evidence that J.C. Penney is still struggling to figure out what its guests even want. Until it even begins to do that much, the long road to recovery for the company can't even truly get started.