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Financial Roundup: J.C. Penney Reshuffles Leadership and Cuts 360 Jobs, Gap Inc. Rides Active to Soaring Sales, L Brands Sales Stagnate

J.C. Penney revamped a number of executive positions and eliminated more than 300 jobs amid positive annual comp-store sales growth, while sales at Gap Inc. jumped 5 percent, largely driven by strength in activewear across all company brands.

J.C. Penney

In a Nutshell: Though comp sales were up for the quarter and the year, JCP missed on earnings.

The company added Joe McFarland as executive vice president and chief customer officer, a role whose expanded scope oversees merchandising and leads all store operations. In the merchandising group, Jodie Johnson was promoted to head of merchandising for women’s, beauty and family footwear, and James Starke was elevated to head of merchandising for men’s, children’s, home and jewelry. Therace Risch, responsible for managing omnichannel retail operations, is now CIO and chief digital officer, taking over from previous omnichannel boss Mike Amend.

Restructuring cut 130 jobs in headquarters and eliminated 230 net associate positions across regional, district and store-level teams, generating expected annual savings of up to $25 million.

Active poses a significant opportunity for JCP, which said it plans to increase its Adidas assortment, boost the number of stores that carry the brand, and create elevated Adidas shops in-store. It’s planning a similar upgrade for Nike as well, and expects to launch additional brands such as Puma, Champion, and Copper Fit.

CEO Marvin Ellison highlighted “the power of the plus-size brand,” noting that Liz Claiborne was added to the plus-size assortment in the second half of 2017 and will add non-comp results due to performing “exceptionally well.”

JCP ended the year with $2.76 billion in inventory, down 2.3% from the prior year.

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Sales: Total fourth-quarter net sales were up 1.8% year over year to $4.03 billion, while comp sales also rose 2.6%. For the full year, net sales shrank 0.3%, which the company attributed primarily to store closures, though comp sales inched up 0.1%.

Earnings: JCP posted net income of $254 million, or $0.81 per share, up from $192 million, or $0.61 per share, in the same period a year prior. The company attributed this gain to the $75 million tax form benefit received in the fourth quarter.

CEO’s Take: Marvin Ellison, CEO, said: “We continue to enhance and strategically adjust our apparel offering to better align with customer preferences. A strategic priority in 2018 will be our continued focus on fixing the women’s apparel business, particularly activewear, dresses, contemporary, and casual sportswear. These categories offer J.C. Penney the greatest opportunity for growth in women’s, and I’m pleased to report that our casual and contemporary categories delivered strong sales growth in the fourth quarter as our customers responded very favorably to the updated assortment in sales floor layout. Each monthly set we delivered in the fourth quarter in women’s, in the fourth quarter and in February, produced positive comps and dramatically improved sell-through rates versus the prior trends.

In addition, the implementation of our speed initiative provided enhanced newness for our customers. The lessons learned in fall and Q4 will be the foundation of our women’s apparel strategy for 2018. Specifically, we are aggressively implementing our new strategy to improve speed and offer great fashion at a value across several categories. And as I mentioned, activewear will be a big part of our growth strategy in women’s. And we are admittedly behind in our assortment, which offers J.C. Penney an opportunity for strong growth in 2018.”

Gap, Inc.

In a Nutshell: Gap Inc.’s turnaround strategy appears to be taking hold, as the company reported its fifth consecutive quarter of positive comp sales growth and foot traffic was above industry metrics throughout the year and positive across all brands in Q4. Activewear in particular is fueling growth across the company, which continues to focus on closing 200 underperforming stores, particularly in the Gap and Banana Republic brands, by year’s end. Gap Inc. shuttered 35 company-operated stores in 2017, ending the year with 3,165 locations.

The company said its strategy coupled with changes in tax reform are expected to significantly increase its future earnings potential.

Sales: Comp store sales grew 5 percent and 3 percent for all of 2017 across the company. Old Navy outperformed, posting 9 percent quarterly comp-store growth and 6 percent for full year.

Gap Inc. generated $4.8 billion in fourth-quarter net sales, growth of 8 percent from the year prior. Full-year sales rose to $15.9 billion. The company increased its operating margin to 9.3%, up from 7.7% the year prior.

Earnings: Gap Inc. reported diluted quarterly earnings per share of 52 cents, a figure that rose to $2.14 for the full fiscal year. Its gross operating margin rose 36.8% above the year prior.

CEO’s Take: Art Peck, CEO, said: “As you saw last week, I made a change at the highest level of leadership in Gap brand. In fourth quarter, we began to see some operational missteps that hindered the brand’s ability to positively comp and finish the year strong. These missteps were primarily related to inventory management that resulted in late product deliveries to stores. Frankly, I have zero patience for a lack of operating discipline. We dug in, I diagnosed the situation, we made a change and we intend to move very quickly forward. We are carrying more inventory at Gap brand right now and we expect to see some promotional pressure in the first half until we correct the flow timing.”

L Brands Inc.

With Victoria’s Secret and Pink having their problems, L Brands saw dips in fourth quarter sales and earnings, but was lifted by growth in its international segment, notably in China.

In a Nutshell: With fourth quarter results at Victoria’s Secret below expectations, L Brands delivered stagnant sales and earnings in the fourth quarter. The company said while it continues to see positive signs from newer product launches and strong growth in digital business, traffic levels in stores continue to be negative.

In its Pink division, comps were up slightly in the fourth quarter, as growth in the bra and panty business was partially offset by a decline in loungewear. The company said it’s leveraging speed capabilities to improve the assortment and expects to see positive results of that effort in mid-April.

Fourth quarter revenue in the international segment increased by 37 percent, driven by growth in sales in both Victoria’s Secret and Bath & Body Works. For the full year, revenue increased 19 percent, driven primarily by growth in China and the Victoria’s Secret and Bath & Body Works franchise businesses.

Sales: Net sales for the 14-week fourth quarter ended Feb. 3 fell slightly to $4.82 billion from $4.49 billion for the 13 weeks ended Jan. 28, 2017.  Comparable sales for the 14-week fourth quarter increased 2 percent compared to the 14 weeks ended Feb. 4, 2017. The extra week in 2017 represented about $160 million in sales.

Net sales were up slightly to $12.63 billion for the 53-week year compared to $12.57 billion for the 52 weeks ended Jan. 28, 2017. Comparable sales for the 53 weeks ended Feb. 3 decreased 3 percent compared to the 53 weeks ended Feb. 4, 2017. The exit of the swim and apparel categories had a negative impact of about 3 percentage points and 5 percentage points to total company and Victoria’s Secret comparable sales, respectively.

On Friday, L Brands reported net sales of $1.04 billion for the five-week period ended Feb. 3 compared to sales of $805.2 million for the four-week period ended Jan. 28, 2017. The fifth week in January 2018 represented approximately $150 million in sales. Comparable store sales for the five weeks increased 7 percent.

Earnings: Operating income in the fourth quarter dipped slightly to $986.6 million compared to $987.6 million a year earlier, while net income increased 32.4%to $664.1 million compared to $631.7 million last year. This included a tax benefit of $92.2 million related to the new U.S. tax legislation.

Full-year operating income increased about 16 percent to $1.728 billion compared to $2 billion last year, and net income fell some 18 percent to $983 million compared to $1.158 billion last year.

CFO’s Take: Stuart Burgdoerfer, executive vice president and chief financial officer, said: “We’re very focused on improving performance in the Victoria’s Secret business, staying close to our customer, improving the customer experience in stores and online, and improving our assortments in compelling new product launches. We will continue to be disciplined in the management of inventory, expenses and capital.”

“Following an extensive evaluation of our wage rates by market, we are making investments in our workforce by increasing wage rates and benefits, principally for hourly associates. These investments will help us continue to attract and retain high-quality talent and be an employer of choice. The impact of these investments is approximately $100 million in 2018 and is included in our guidance. Excluding the impact of these wage investments, our operating income forecast is for low single-digit growth at the high end of our range. We, as a management team, would not be satisfied with that result and are working hard to do better.”

Reporting by Jessica Binns and Arthur Friedman.