J.C. Penney cut its Q3 loss but sales failed to rise above year-ago numbers

J.C. Penney shaved its third-quarter loss and beat analyst profit forecasts, but sales weakened during the quarter.

Penney’s sales are slowing just as it’s embarking on a plan to regain $2 billion in lost sales over the next three years. The Plano-based department store chain posted flat third-quarter same-store sales from a year ago, missing its forecast for sales to be up in the low single digits.

CEO Mike Ullman had warned earlier that September sales were weak. On Wednesday, he said October was also disappointing.

Ullman said he is confident that for the holiday season, Penney has merchandise and discounts planned that will appeal to its middle-income customers.

“So far, in the first 10 days of November, we are pleased,” he told analysts during a conference call.

Penney reported results after the market closed Wednesday. The company’s stock price was up 56 cents a share to close at $7.76. But the stock is down 15 percent so far this year as investors take a wait-and-see attitude on Penney’s progress.

While Penney’s home department posted a double-digit sales increase in the third quarter, that key department is still clawing back to regain lost sales.

Home was virtually dismantled during the failed attempt to transform Penney by former CEO Ron Johnson. Home items also represented a huge share of online sales, and the online operation was neglected during 2012 and 2013 when Johnson focused all efforts on stores.

In a call with analysts, Ullman was supportive of the home department staff.

“I think the home team’s done a terrific job of reinventing itself, having gone through a changed experience that none of them expected to have in their careers,” he said. The layout of the home stores and the merchandise are in much better shape than six months ago, he said.

But analysts said they expected more progress by now. They’re also worried about consumers’ holiday spending plans.

“Sales performance has been very weak,” said Craig R. Johnson, president of Customer Growth Partners. The flat results followed two weak years — a sales decline of 4.8 percent last year and a decline of 26.1 percent the prior year, he said.

“There was a huge amount of damage done to this company and all sorts of time bombs left around, but it’s difficult to put rose-colored glasses on these results,” Johnson said. Strong sales growth will cure all Penney’s ills, he said.

Weakness also showed up in Penney’s online sales. Sales at jcpenney.com were up 3.4 percent from a year ago. The prior year, sales had increased 29.8 percent.

Ullman and chief financial officer Ed Record said they were disappointed by the small increase and noted it was tough to go up against last year, when Penney was discontinuing several brands brought in by Johnson.

As the holiday shopping season begins, S&P Capital IQ analyst Efraim Levy said, “Lower-end consumers remain wary, even amid rising employment, lower gas prices and a near record stock market.”

Overall, Penney’s bottom line is improving. As it has added back more private label merchandise in its stores, Penney’s gross margins improved significantly in the third quarter.

Penney reported a net loss of $188 million, or 62 cents a share, in the quarter ended Nov. 1, compared with a net loss of $489 million, or $1.94 a share, a year ago.

Total sales of $2.76 billion compared with $2.78 billion in the same quarter a year ago. While same-store sales were flat, they are up 4.3 percent year-to-date. Penney has said it expects sales to increase 5 percent a year in order to achieve its goal to be profitable by 2017.

Analysts surveyed by Thomson Reuters forecast a loss of 80 cents a share and a sales increase of 1.1 percent. A year ago, Penney’s sales turned positive in October for the first time in two years.

Ullman introduced Penney’s new president and CEO-designee Marvin Ellison during the call. Ellison officially joined the retailer on Nov. 1 from Home Depot.

Ellison said he was impressed with the people he’s met so far and the progress in Penney’s turnaround but said it was too soon for him to discuss strategy. The plan is for Ellison, 49, to become CEO in August. At that point, Ullman, 68, will stay on as executive chairman for a full year. Before joining Home Depot in 2002, Ellison was at Target for 15 years.

Penney updated its guidance for the full year: It expects same-store sales to rise in the range of 3.5 percent to 4.5 percent, and it plans to have positive free cash flow.

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