J.C.Penney: Ullman's Team Is A Reason For Optimism

J.C.Penney’s second quarter of 2013 is one everyone would like to forget. Sales were down 11.9% to $2.66 Billion, gross margin were down to 29.6 % and the company incurred a net loss of $586 million or $2.66 per share. While CEO Mike Ullman presided over the company in the quarter, it was really the previous failed administration under Ron Johnson that must take the blame for losing more share of market and incur heavy losses.

I am encouraged about the future. While the third quarter can be looked upon as a transitional quarter – with sales improving month by month and earnings edging towards a breakeven point – I am convinced that the fourth quarter can be very positive with strong sales increases and good earnings that could erase the losses in the third quarter. Thus, for the second half of 2013 I look for a strong rebound in sales and earnings.

During the conference call with analysts, management discussed the lack of momentum in the home store and that with a better layout by classification it is expected to appeal to more customers. The merchandise will be better coordinated and more appealing. Liz Sweeney, who is now GMM for fashion and home, will oversee the coordination.

I think it is very important that as a seasoned fashion expert, Liz Sweeney understands that fashion colors and coordination will give a feeling of excitement to the home store. In the past, when J.C.Penney’s headquarters was at 1301 Avenue of the Americas in New York rather than Plano, Texas, color palates were developed by fashion coordinators who oversaw the introduction and standardization of new colors in all home departments.

Home, which traditionally accounted for 24% of sales dropped to less than an estimated 11% in the second quarter. In addition to greater fashion coordination we can expect sales events by classification rather than by brand. The home store layout will be more productive with more special promotions using tables.  Similar efforts are underway in the fashion area, where merchandise like St. John’s Bay, Liz Claiborne and other private labels are being restocked. Private labels are likely to rise as a percentage of sales and help stabilize gross margin. I look for gross margin to return to the 37%-38% range by the fourth quarter for the highly depressed levels in 2Q13.

It is work in progress. The third quarter will be impacted by lower sales in August, which I believe is the inflection point of sales for the company.  Last year, in August 2012, there were 1.5 million free haircuts given to children ready to go back to school. The event generated heavy traffic. In addition the company took heavy markdowns in August last year, so that 35% of total sales was clearance merchandise.  I expect that September and October will see a reduction of these difficult year over year sales comparisons and ultimately revenues will be flattish for the quarter.

Getting J.C.Penney back on track is a monumental challenge. The company faces a very promotional environment with Macy’s, Kohl’s, Target offering value promotions once or twice a week. But there are some encouraging signs.  J.C.Penney has traditionally been a low price store in the market, and customers are likely to return as the the private and national brands they trust are offered once again. It is encouraging that Internet sales, which had dropped $215 million through sheer neglect by the Johnson regime, have shown a 14% rebound in July. This reflects the installation of a new team that understands what the customer wants and how to promote it to her.   In my opinion, Mike Ullman has assembled a strong team capable of returning the company to profitability in 2014.  It’s an uphill battle for sure, but I think they can get there.