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After A Promising Year, Can J.C. Penney Meet Expectations In 2018?

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J.C. Penney has demonstrated genuine commitment to improve its business and to grow earnings. The company reported fourth quarter and year-end sales and earnings that indicate a positive result of several successful initiatives.

In the third quarter of 2017, the company modernized its apparel assortment by clearing slow selling and unwanted women’s apparel. Additionally, in the next couple of weeks, it will be updating its men’s and children departments throughout the chain. In addition, during the fourth quarter, management identified the key performing divisions: jewelry, home, Sephora, handbags and footwear, as well as the Beauty Salon. Women’s apparel and men’s and children clothing still lagged. However, management did see an increase in these slower selling categories With the announced additional apparel updates I expect a stronger performance for Easter and beyond.

J.C Penney announced that it in fiscal 2018 it would intensify promotions to gain market share for other underselling product lines. With improved fourth-quarter sales, they will look for further profits in appliances, mattresses and furniture. With the closing of many Toys “R" Us stores management hopes to benefit from the addition of toys.

I predict that these two initiatives will be less successful. I have commented before on the fact that furniture and appliances carry lower margins than apparel. Toys, which are frequently discounted, are a difficult classification since much of the blockbuster sales are dependent on television promotions and sale events. Sales for toys only spike during the Christmas selling season.

In the past year, the company has closed 127 stores and a distribution center causing major restructuring charges. Eight additional stores will be closed in the current year. As a result, 1030 associates have lost their job. While unfortunate for the labor market, I think that this is a positive move for J.C. Penney, since unproductive stores are a drag on its profits. It is appropriate to downsize the company and to have more direct reporting.

I am distressed by management’s report that inventory shrinkage went up. While there was no clarification, I believe that the loss during the reset of the apparel departments may have been part of the problem. Lack of staff at critical selling times may also have contributed higher losses.

Management is focused on reducing J.C. Penney’s high debt. During the fiscal year, the company reduced long-term debt by $600 million to $3.8 billion from $4.4 billion through cash flow. This was helped by tight inventory control (which was down 3.2% year over year), and a reduction of associates and assets. I believe it will be possible to reduce the debt further with cash flow in fiscal 2018. However, one has to be concerned that rising interest rates may offset the company’s ability to reduce debt.

The company indicated that it had reduced its sales promotional activity. In the highly promotional environment. I question whether the company can reduce promotions successfully. It has stepped up its advertising with omnichannel activity and by strengthened its buy online/pick up in store activity. An additional benefit of this approach is that in many cases the customers will do some impulse shopping when they come to the store for merchandise pick-up.

For the fiscal year, the company reported adjusted sales of $12.6 billion, down 0.3%. Comparable store sales increased 0.1%. It was indicated that store closures in the early part of the year contributed to the sales shortfall. Adjusted earnings increased $44 million to $68 million, or $0.22 per share for the fiscal year. This compares to adjusted net income of $24 million, or $0.08 per share, in fiscal year 2016.

Guidance for the coming year by management is very conservative and troublesome. Management is looking for comparable sales of 0.0% to 2.0% and earnings per share on an adjusted basis to be between $0.05 and $0.25. I hope the company will do better in order to survive.

I am looking for an improvement in sales and earnings since Marvin Ellison, chairman and CEO, has made some dramatic executive changes. He appointed VP of Stores Joe McFarland as EVP and Chief Customer Officer. (I think it is a strange and vague title). He replaces GMM John Tighe who left the company. Reporting to McFarland will be Jodie Johnson, head of merchandising for women, beauty and family footwear, and James Starke who will be in charge of merchandising men’s, children, home and jewelry. In addition, Therace Risch will assume the combined responsibility of Chief Information Officer and Chief Digital Officer. Risch is assuming the duties of Chief Digital Officer Mike Amend who also left the company. Management is excited that these people will make a strong merchandising team both in stores and for e-commerce.

While the company is making all the right moves; changing store presentation, appointing savvy people to execute better customer service and financial management that seeks to have lower debt and more liquidity. I still see many challenges ahead. The essential challenge is the continuing upswing of apparel sales, which is essential for greater profitability and long-term growth of the company.  I hope that a stronger promotional effort will support that challenge.