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J.C. Penney Narrows Q3 Loss. Is the Turnaround Plan Working?

J.C. Penney Co. Inc. posted a third-quarter result that was better than Wall Street expected, and CEO Jill Soltau offered a glimpse into the retailer’s turnaround strategy.

In a Nutshell: JCP ended the quarter with liquidity of about $1.7 billion, and expects at least $1.5 billion for the remainder of the year, offering some breathing room for the balance of the year and into 2020 to continue with its transformation agenda.

In a conference call with Wall Street analysts, Soltau detailed the ongoing efforts in JCP’s Plan of Renewal.

“Our research shows that the all-in shopping enthusiast represents over a quarter of all home and apparel retail sales. And the good news is, they are already shopping with us. We need to deliver on what is imperative to this customer, allowing us to capture more of their wallet and by getting it right, it will halo onto other valuable customer segments,” Soltau said of the retailer’s core customer, the shopper who lives life to its fullest and seeks the most out of everything.

Newly installed chief merchandising officer Michelle Wlazlo and her team launch their first collection in the spring, and Soltau was quick to note that what they have done with the current collection is “resonating with the customer.”

Recent fall offerings from Worthington, A&A and Liz Claiborne have exceeded company expectations, she added, and sweaters, wovens and shirt jackets performed well in the newly launched men’s outdoor shop.

The new strategy of merchandising by lifestyle better delivers and showcases the looks that customers want. “We started first in women’s and we will extend this architecture to men’s, children’s and home,” Soltau said, noting how the company is improving its visual merchandising to help bring product to life and inspire shopping through storytelling.

“It may seem obvious to have visual merchandising in a department store,” she told investors, “yet it is something J.C. Penney had moved away from in the past and that was a mistake.”

JCP’s new concept store, which opened in Hurst, Tex., is the result of test-and-learn strategy from four single store concepts, including a styling room staffed with dedicated styling experts and technology that helps shoppers request new sizes or colors be brought into the fitting room.

“We took our learnings and incorporated three of the test-and-learn along with the lifestyles merchandising and visual merchandising into a single store,” Soltau explained. The Hurst location is neither a flagship store nor a prototype, but a lab with more than 100 touch points that will give Soltau and her team more information on how JCP’s broader strategy should evolve.

Walter Loeb, former retail analyst and now consultant, believes there’s “enough enthusiasm” for Soltau successfully getting JCP on the right path “but it will be more difficult than anyone thinks,” referring to how tariffs could impede the retailer, which produces a large quantity of its goods in trade war-embattled China.

Loeb also responded positively to idea for the new concept store, which has Soltau picking and choosing what to scale into other stores. It doesn’t hurt that vendors rely on J.C. Penney, he added, which will offer valuable allies in Soltau’s turnaround plan.

Net Sales: Total revenues for the three months ended Nov. 2 fell 8.5 percent to $2.50 billion from $2.73 billion. Revenues included a 10.1 percent decline in total net sales to $2.38 billion from $2.65 billion. The balance of revenue consisted of credit income. Comparable store sales fell 9.3 percent, or down 6.6 percent on an adjusted basis, excluding the impact of the retailer’s exit from major appliances and in-store furniture categories.

The company said inventory fell 9 percent to $2.93 billion in the quarter.

The retailer updated its denim assortment for back-to-school, although BTS shoppers came out later in the season and bought closer to their seasonal needs. Men’s apparel sales outperformed all other categories in the quarter. Women’s apparel sales did better than the company’s go-forward business projections, with casual sportswear, career separates and dresses performing better overall.

Earnings: The net loss was narrowed to $93 million, or 29 cents a diluted share, from the year-ago loss of $151 million, or 48 cents. On an adjusted basis, the net loss was 30 cents a diluted share.

Wall Street was expecting a loss of 55 cents on revenue of $2.51 billion.

For its outlook, the company said its expect free cash flow to be positive, with adjusted comp-store sales in the range of down 7 percent to down 8 percent. It also guided adjusted earnings before interest, taxes, depreciation and amortization to exceed $475 million for full year fiscal 2019.

During the call, chief financial officer Bill Wafford said the company paid $50 million of unsecured notes at maturity during the quarter, and has “very manageable near-term debt maturities with $105 million of unsecured debt maturing [by] end of 2020.”

CEO’s Take: According to Soltau, “We are beginning to see results–both in our numbers and how we operate as a business–from the early implementation of our Plan for Renewal, which is focused on driving traffic, offering compelling merchandise, providing an engaging experience, fueling growth, and building a results-minded culture.

“Going forward, I am confident that delivering our strategy, coupled with our ongoing discipline and commitment to improving the foundational elements of our business, will return J.C. Penney to its rightful place in the retail industry,” the CEO said.

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