J.C. Penney (NYSE:JCP) kept up the momentum of its turnaround in the first quarter, albeit at a slower pace than we've previously seen. While net sales slightly missed analyst expectations, even as they rose 2% from last year, operating losses narrowed sharply and net losses were halved.
However, the retailer remains in a state of flux, sometimes going one step backward even as it takes two steps forward. Here are five key things for J.C. Penney shareholders to keep in mind.
1. A sharp-dressed man -- and woman -- will steal market share
Both women's and men's apparel are among the top drivers in J.C. Penney's plan to steal market share from the competition. Together they account for more than half of all the retailer's sales and are on pace to exceed levels not seen since 2011.
Looking at how the competition stacked up in the first quarter, Penney's plan appears to be paying off. While comparable sales at J.C. Penney spiked by 3.4%, comps rose just 1.4% at Kohl's and contracted slightly at Macy's. And the latter's efforts were mainly bolstered by third-party licensees in its stores; otherwise, comps would have fallen by nearly 1% in the quarter.
Apparel is a $1 billion opportunity for J.C. Penney, enhanced by expanding its online presence. The retailer realizes that could be where it scores big. As CEO Myron Ullman noted during the quarterly conference call: "We know that [an] apparel customer in the store is not necessarily shopping us online for the same category, which is maybe just a function of them not really getting back online with us as much as they were several years ago."
2. The "center core" is the center of its turnaround
Six components comprise J.C. Penney's center core strategy, each offering the retailer higher profit margins than other segments of its operations. So far beauty products supplier Sephora (another $1 billion sales opportunity) remains the star performer.
The store-in-store boutiques have been one of the main drivers of traffic. Once in the store, the Sephora customer is proving willing to shop in other departments, too. With J.C. Penney expanding its relationship with the beauty supplies leader to also sell its merchandise online, the retailer has a major opportunity to translate that into additional website sales.
President and CEO designee Marvin Ellison said Sephora doesn't just disinguish J.C. Penney from the competition, but also helps "create an emotional connection with our customers that result in more trips to our store with high rates of conversion and AUR," or average unit retail, which is a fancy way of saying higher average prices.
Also look for handbags, shoes, and jewelry to start contributing to the overall health of the company as the year progresses. Store resets are due for completion for later this year and bolster management's new confidence in higher same-store sales for 2015.
3. Shop where, how, and when you want
The growth of the omnichannel shopping experience will minimize the overall impact that foot traffic in J.C. Penney's bricks-and-mortar stores has on performance. It's not necessarily a diminution of the one as an elevation of the other.
An omnichannel customer shops 2.5 times more frequently over the course of a year than a traditional customer does, according to the company, so J.C. Penney will roll out several initiatives to capture that greater spending, including enabling shoppers to buy goods online and pick up the purchase in-store on the same day. A companywide rollout is planned for next year, and with good reason.
J.C. Penney found a buy-online/ship-to-store customer will purchase additional merchandise 20% of the time when visiting the store. As the retailer views the omnichannel market as an $800 million sales growth opportunity through 2017, keeping the experience as seamless as possible ought to give it a leg up.
As Ellison said, "it is essential that we continue to convert store-only customers to omnichannel."
4. JCP has a leg up
J.C. Penney has a long history as a catalog retailer, and though the 1,000-page book won't make a comeback, the introduction of smaller booklets focusing on the home department will be a targeted opportunity.
That catalog history gives it a leg up on its rivals because as they also implement an omnichannel strategy, they need to engage in a costly build out of their infrastructure. J.C. Penney already has much of it in place; this year's capital budget of $250 million to $300 million may seem low in comparison with the competition, but all it really needs to do is digitize its systems. The retailer already has distribution centers in place, and in fact is converting many of its stores into fulfillment centers.
Using what it calls enterprise inventory, J.C. Penney will fulfill online orders from its store-based inventory. In the first quarter it expanded the number of locations used to fulfill online orders by over 160 stores.
As Ellison explained, "we are not building [distributions centers], we are just trying to create platforms to digitally connect those DCs to the customers for what we call seamless transactions for them to purchase in-store, online, etc."
5. Fanciful financial engineering is not on the agenda
While other retailers might engage in some slick financial gymnastics with their real estate portfolios to make themselves look more financially fit, J.C. Penney has no such plans.
The retailer has over 1,020 stores in its portfolio, and while it does keep an eye on the potential for sale-leaseback opportunities or converting some properties into a real estate investment trust, it's largely just that: monitoring the situation. J.C. Penney looks at market conditions, but really is more focused on getting its operations back on track.
As for its debt, the retailer admits it possibly overcollateralized some of it, but until this month has been prevented from doing much with it by a provision that prevented early prepayment. However, with that provision expiring, J.C. Penney says it could do something there, but as the note doesn't come due till 2018 it is under no time pressure to act.
As CFO Ed Record noted during the conference call, "We're focused on driving EBITDA and driving top-line results and we'll continue to look at it and there may be an opportunity for us down the road, but it's not top priority right now."
What's it all mean for investors?
It's natural to get antsy in wanting better financial performance right away, and though J.C. Penney's operations did come unhinged in rather short order, it's going to take time to get it right.
By all accounts the retailer is moving in the right direction and has instituted a plan that has been working well. As it continues to execute on that plan, barring any major new economic upheavals, J.C. Penney ought to be a solid company once again.