Why J.C. Penney's Holiday Sales Decline Was Worse than It Looks
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It was a rough holiday season for department store chains, and J.C. Penney (NYSE: JCP) was no exception. The company is still in a rebuilding phase following Ron Johnson's decimation of the brand in 2012.
After steadily bringing customers back in the door, current CEO Marvin Ellison had reassured investors that the company would post a profit in 2016 for the first time since 2011. However, after its performance during the holiday season, that prediction may be in doubt as comparable sales fell 0.8% in November and December. Ellison said the company struggled through the first three weeks of November, "consistent with trends in the broader retail industry." However, comparable sales improved from the Thanksgiving and were actually positive. Ellison also said the company's turnaround in profitability "remains on track."
Management had originally called for a comparable sales increase of 3-4%, but lowered that to 1-2% after the company's third-quarter report. However, through the first eleven months of the fiscal year, comparable sales are about flat. That's a problem, because J.C. Penney has introduced a number of initiatives that were supposed to boost sales -- part of the reason it had called for 3-4% comp sales growth to begin with. Back in August, Ellison even touted "the initiatives we have in place to drive incremental growth in the back half of the year." Here a few of those moves that have either failed to add incremental growth, or have not made up for sliding sales elsewhere.
J.C. Penney's boldest move this year seemed to be getting back into the appliance business for the first time in 33 years. The decision came as rival Sears Holdings (NASDAQ: SHLD) , a major appliance seller, has been bleeding sales and closing stores, and J.C. Penny's began to noticed that customers were searching for appliances on its website. Ellison came to J.C. Penney from Home Depot , and seems to be relying in part on home improvement products to drive its comeback. The company has also been testing selling flooring with Empire Today, and has made efforts to increase sales of blinds, curtains, and other home decor products.
Penney began the launch with a pilot program testing appliance sales in 22 stores, and over the summer said it would expand to about 500 stores, or about half of its total fleet. That seemed to be a sign that the program was delivering positive results. In spite of the expansion and management's saying it saw strength in appliances, however, comparable sales still fell in the second half of the year.
Possibly the best strategic decision J.C. Penney has made in the past decade was forming an exclusive partnership with Sephora, the popular cosmetics company that now operates shops in about half of Penney's stores. As a destination in and of itself, Sephora helps drive traffic to Penney's location, and some customers end up shopping in other parts of the department store. It also helps Penney attract a more upscale customer and spruce up the company's image.
Penney's planned to open nearly 100 new Sephora locations and also aimed to redesign departments near the Sephoras to make them more attractive to shoppers, as only 25% of Sephora shoppers were shopping in the rest of the store. Like appliances, the company said performance at Sephora was strong during the holiday season, but it did not have the overarching effect desired.
Another growth opportunity management has identified is fashionable plus-size clothing. Fashion labels often make clothes only up to size 12, leaving out a significant piece of the market. J.C. Penney teamed up with Project Runway winner Ashley Nell Tipton to launch Boutique+ in the spring at 500 stores, and in the fall Tipton launched her own collection as an extension of Boutique+.
Plus-size women's clothing is an estimated $20 billion market in the U.S., and it's outgrowing women's clothing in general. Women's clothing is Penney's biggest segment, but poor sales in women's apparel seemed to be the major reason why Penney's comparable sales fell during the holiday season as it was the only category it named as experiencing weakness -- the company said it "continued to impact our performance."
Despite J.C. Penney's weak second-half performance, the company is still trimming costs and working toward profitability, and seems to have outperformed some of its department store peers as the entire industry faces headwinds. Analysts are still expecting profit growth in 2017 as well.
The company also released a bit of a good news this month, saying that it formed an agreement with Nike to open 500 of Nike shops within its stores.
Though the recent decline in comparable sales is discouraging, I would give Ellison and company a few more quarters to see if the recent strategic moves pay off.
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