American retailer J. C. Penney reported disappointing earnings and sales figures for the fourth quarter of fiscal 2013. Sales and earnings were both much lower than analysts had expected and management’s strategy questioned.
The century-old retailer reported a fourth quarter net loss per share of $1.95 Feb. 27, about ten times worse than the $0.19 that Wall Street expected. Sales for stores open at least a year were 31.7 percent lower than the expected $4.1 billion, coming in at $3.9 billion. Shares were down 14 percent in after-hours New York trading Feb.27 and extended losses during the day session Feb. 28.
“Sales and customer traffic were below our expectations in 2012, but as we execute our ambitious transformation plan, we are pleased with the great strides we made to improve J.C. Penney’s cost structure, technology platforms and the overall customer experience,“ said Ron Johnson, chief executive officer of J.C. Penney, according to a company press release.
While it is true that J.C. Penney managed to cut overhead expense by 10 percent during the quarter, its gross margin went down to 23.8 percent from 30.9 percent, which the company attributes to higher clearance sales. “We were most surprised by the 10 percent decline in gross margins in the quarter,” wrote Citigroup in a note to clients.
The analysts say that as the cost of goods sold went down less than the decline in sales, it nullified the $135 million cut in overhead expense. Nonetheless, Citigroup still rates the stock a buy: “In our view, J.C. Penney has significant opportunity to drive top-line growth and improve bottom-line profitability as it executes its transformation initiatives.”
After a disappointing first year for Johnson, it is precisely the transformation strategy that is starting to be questioned. Johnson completely scrapped promotional events at the company last year in order to attract high-value brands.
Hedge fund manager Bill Ackman, whose Pershing Square funds owned a 3.25 percent stake in the company as of Sept. 30, 2012, outlined the reasons for the new strategy in a letter to investors last year: “Over the last 20 years, JCP had implemented an extremely promotional strategy with more than 500 promotional ‘events’ [in 2011]. The result of this strategy had been declining sales, reduced margins, and an inability to attract high quality, proprietary merchandise in the stores.”
Given even more disastrous full-year results for 2012 with the new strategy of not providing discounts, Johnson performed a complete turnaround and is bringing back one sales event per week. This is something that analysts are not pleased with.
Retail analyst Stacey Widlitz told CNBC: ”Ron Johnson basically just admitted that he’s made a mistake—that the consumer has voted and they vote for discounts. So, he’s going back to discounting. This company spent a billion dollars in the last year to take away discounts and do a 180 and go back to where they came from.”
Ron Friedman, a retail practice leader at the consulting firm Marcum LLP told Reuters: ”He’s going to have recover this year or he’s done. He’s running out of time. He has to have it turned around by the third quarter.”
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