j.c.penney store-within-a-store redesign, retail localization

Ron Johnson’s J.C. Penney Plan Continues To Transform Stores

Struggling retailer JC Penney (JCP) reported lower than expected second quarter results Friday. Sales fell a startling 23% to $3.1 billion, driven by a same-store sales decline of 21.7%, both of which were worse than expected. The firm swung to a loss of $0.37 per share on a non-GAAP basis versus a profit of $0.07 last year, which was also worse than the Street predicted. The company no longer gives full-year earnings guidance, but CEO Ron Johnson did point out that sales won’t fall much more than 20% in the back half of the year.

j.c.penney store-within-a-store redesign, retail localization

Though gross margins fell on adjusted basis 170 basis points to 36.6%, most of the decline can be attributed to liquidating old clearance merchandise at tremendous discounts in order to clean-up inventory. Selling margins on everyday items, as calculated by the firm, increased 380 basis points to 51.2%. The firm also cut SG&A expenses by $193 million year-over-year and remains on target to achieve $900 million in cost cuts by 2013. The retailer is getting rid of old, tired merchandise that should be replaced by more profitable and popular items.

In the short-term, it’s hard to ignore the fact that sales are falling sharply. However, we think Johnson might be on to something. Clearly, the promotional department store model wasn’t working before, and the firm risked being cannibalized. JC Penney is taking a risk on transforming its business model, and we think it might work (but we’re not completely on board). Wall Street is generally unwilling to give any firm time to transition its business model, so the stock should continue to languish as Penney’s sales and earnings tumble throughout the rest of the year.

[via Seeking Alpha]

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