J.C. Penney turnaround continues apace as shoppers begin to return

The retail chain’s strong sales gains have lifted its gross profit margin and cash holdings, signaling its turnaround is working.

Looks like “back to the future” is working for J.C. Penney JCP -2.46% .
The department store chain reported on Thursday that comparable sales rose 6% last quarter, beating Wall Street expectations. The results show that its strategy of going back to a heavy roster of promotional events and bringing back and expanding its own in-house brands is working to help it win back shoppers. Penney inadvertently chased away customers when it unsuccessfully tried in 2012 under former CEO Ron Johnson to get fancier and ditch coupons and sales events.
The retailer expects a similar pace of growth in the current quarter, which includes back-to-school.
Perhaps more important, the company, which a year ago was facing a severe cash crunch, said it expects its business to generate more cash than it believed it would earlier this year.
Penney now expects to generate positive cash flow, rather than breaking even as per its earlier forecast, and it now expects to the end the fiscal year that concludes in early February, with $2.1 billion in cash, rather than $2 billion. During the quarter, it generated $76 million more in cash than it used, helping it build its cushion.
“As we approach the completion of our turnaround, we are focused on re-establishing J.C. Penney as the premier shopping destination for the moderate consumer,” CEO Mike Ullman said in a statement, also claiming that Penney is winning back market share. He also said he expect Penney to have a profitable back-to-school season, which the second most important time of year for the chain, after the holiday season.
Penney shares rose 5.4% after hours after jumping 4% during regular hours, and are above the $10 mark for the first time since November.
Ullman, who returned in April 2013 to fix Penney after serving as CEO from 2004 to 2011, did not participate on the conference call with Wall Street analysts after the results were released because he is recovering from an unspecified surgical procedure, the company said. Penney is currently looking for a successor for him.
While it was Penney’s third straight quarter of growth, sales remain well below pre-Johnson levels. His failed experiment led to a 30% revenue fall over two years. And one potential source of concern was traffic continued to fall last quarter.
Things have improved since Ullman gave even more floor space to popular house brands that Johnson had dumped, such as St. John’s Bay and reverted to Penney’s promotional tactics. Penney also ditched brands such as Joe Fresh and Michael Graves that failed to catch on with shoppers but which had been the centerpiece of Johnson’s strategy. Penney is done clearing out all that unsold Johnson-ordered merchandise and, with that merchandise now a distant memory, Penney’s gross margin rose 6.4 percentage points to 36% of sales, getting close to the 39% level the retailer used to hit regularly.
Another promising development for Penney last quarter was a 16.7% rise in e-commerce sales, the result of Ullman re-integrating the planning and buying teams for both the online business and the stores.
Penney’s relatively strong performance comes at a time other retailers are struggling. Wal-Mart Stores WMT -0.66% and Macy’s M -0.67% each lowered their forecasts this week and spoke of a still reticent consumer, while Kohl’s KSS -0.05% reported a decline in comparable sales.
For the first quarter ended August 2, Penney reported a net loss of $172 million, or 56 cents per share, compared with a loss of $586 million, or $2.66 per share, a year earlier. Excluding certain items, Penney had an adjusted loss of 75 cents per share during the quarter, while Wall Street was expecting a loss of 90 cents.