JC Penney rebound continues with strong Q2, losses slashed

JC Penney Co took another step towards the sunshine Thursday, reporting better Q2 sales, much improved margins and a vast cut in its losses. Its shares initially leapt 11% in after-hours trading but eventually settled up 3.2% at $10.05, having ended the regular session up 4%. Penney, which had lost more than $2.7bn since early 2012, reported a Q2 loss of $172m/56 cents a share, way ahead of the $586m/$2.66 loss a year ago. Excluding restructuring-related charges, tax-loss carry-forward impacts and other items, the loss was 75 cents a share compared to a loss of $2.16 last time. Analysts expected a per-share loss of 93 cents.

Having sold less merchandise on clearance, gross margin widened substantially to 36% from 29.6% while inventory levels dropped 9.7% to $2.85bn.

Revenue increased for the third quarter in a row, up 5% to $2.8bn from $2.7bn a year ago, still 28% below the $3.9bn recorded in Q2 2011. Analysts had expected revenues to hit $2.79bn. Online sales jumped 16.7%.

Same-store, meanwhile, sales rose 6%, in-line with its own expectations, and the retailer said it expects consistent gains in Q3.

Stand-outs in the quarter were women’s and men’s apparel and accessories, fine jewellery and homewares, Penny said. The Sephora beauty unit also continued its strong performance, it added.

Geographically, all regions delivered sales gains over the same period last year with the best performance in the southern and western regions of the country.

Although footfall in Q2 still remained lighter than a year ago it improved on Q1 as the retailer also noted it had also gained market share.

“It’s not as easy as just putting back the merchandise and they will come back,” CFO Ed Record said of the challenges of re-engaging customers. Although they are spending more at the chain on average, it still isn’t back to 2012 levels, he noted.

Record also said Penney was bracing for a cut-throat Holiday season: “We will need to be competitive to drive the customers back into the store,” he reiterated.

“Our turnaround initiatives continue to produce improved financial results,” chief executive Myron Ullman said Thursday. “In the second quarter, we gained additional market share while significantly increasing gross margin in a highly competitive promotional environment.”

For Q3, Penney expects comps to increase mid-single digits, gross margin in-line with Q2 and SG&A expenses slightly above last year’s levels.

For the full-year, comps are expected to increase in the mid-single digits, gross margin is expected to improve “significantly” versus 2013. Liquidity is expected to be around $2.1bn at year-end, capital expenditures expected to be around $250m and depreciation and amortization around $640m.

JC Penney has launched a campaign to promote the image of its important house womenswear brand Liz Claiborne, with print, online video, digital and social ads.

The campaign, a first working with New York fashion ad agency Yard, features a new brand theme ‘Love, Liz Claiborne’. Siiri Dougherty, senior vice-president and general merchandise manager for womenswear said the campaign is designed to “make sure we stay relevant, and not just grow old with the older customer” who knows the brand. “It’s a multigenerational brand, and we want to continue to be so,” Dougherty said, and as a result it must “appeal to the new 35 year-old” as well as long-time brand fans.

To that end, the new ads will be “upbeat and free-spirited”, she added, celebrating “empowering women and self-expression.”

Ads that depict three female friends eating cupcakes offer the advice: “If it feeds your inner light, it’s not an indulgence. It’s a necessity”. Ads with a woman sharing pizza with friends at an after-party declare: “When the festivities are over, the real celebration begins”. And ads with a confident woman putting on lipstick as she waits for an office elevator asserts: “When you own the room, you can decorate however you please”.

The ads are to appear in the print or online versions of magazines such as Food & Wine, InStyle, More, People, Real Simple and Redbook as well as websites including AOL, BuzzFeed and Hulu. Depending on the response to the online commercials, Dougherty said they may also run on TV.

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