J.C. Penney posts Q4 loss of $87 million amid restructuring, revamp charges
Dallas — J.C. Penney Co. swung to a loss of $87 million in the fourth-quarter, compared with a profit of $271 million in the year-ago period. The chain’s results were dragged down by restructuring and management transition charges, as well as costs tied to its new pricing strategy.
Revenue fell 5% to $5.42 billion, reflecting the company’s exit from its catalog business. Analysts expected $5.5 billion. It was the third consecutive quarter of declining revenue. Same-store sales were down 1.8%. Gross margin fell 7.4 percentage points to 30.2%, hurt by heavy markdowns.
"While 2011 was a year of transition at J.C. Penney, 2012 will be a year of transformation," said CEO Ron Johnson. The former Apple stores head became chief executive of J.C. Penney in November.
In January, J.C. Penney announced a three-tier pricing strategy, effective Feb.1, which eliminates short-term discounts and frequent promotions in favor of everyday lower prices (about 40% less than initial prices of a year ago) and clearance events the first and third Friday of each month.
The company also is updating its assortment of brands and the store experience, with a big emphasis on in-store brand shops. The retailer ultimately expects its stores to feature 80 to 100 brand shops
“As we embark on this transformation, the strategic changes we are making to our business model will dramatically simplify J.C. Penney’s operations, significantly lower the company’s cost structure and create a platform for growth that will result in improved profitability in 2012 and beyond," Johnson said.
For the year, J.C. Penney’s total sales decreased 2.8% to $17.3 billion and online sales were essentially flat at $1.5 billion. The company reported an operating loss for the full year of $2 million, which included $451 million of restructuring and management transition charges.
JCPenney’s Q4 loss afterthought amid talk of transformation
Fourth-quarter same-store sales at JCPenney declined 1.8%, and the company lost $87 million, but those details are being overlooked for the time being as execution of the transformation strategy envisioned by CEO Ron Johnson began less than a month ago.
Costs associated with Johnson’s grand plan to transform JCPenney from a mid-tier also-ran to America’s favorite store were reflected in fourth-quarter results the company reported Friday morning. As previously announced, the company’s reported loss included restructuring and management transition charges which totaled 56 cents a share as well as the financial impact of actions taken to execute the company’s new “fair and square” pricing and promotional strategy, which lowered fourth quarter earnings by an additional 59 cents a share.
“While 2011 was a year of transition at JCPenney, 2012 will be a year of transformation,” Johnson said. “With this in mind, our associate teams worked tirelessly throughout the quarter to get the stores ready for Feb. 1. I want to thank them for their amazing efforts.”
Those efforts are expected to help the company produce full year 2012 earnings of at least $2.16 excluding additional charges related to execution of the company’s transformation strategy, which is focused on simplifying operations, minimizing promotional activities and enhancing the store experience with the infusion of propriety brands presented in a series of shops.
“As we embark on this transformation, the strategic changes we are making to our business model will dramatically simplify JCPenney’s operations, significantly lower the company’s cost structure and create a platform for growth that will result in improved profitability in 2012 and beyond,” Johnson said. “We look forward to updating our shareholders, our vendors and other key stakeholders on our progress throughout the year, beginning in May 2012 with our first quarter earnings release.”
In the meantime, JCPenney saw fourth-quarter sales decline 4.9% to $5.4 billion and online sales decline 3.1% to $480 million. The sales decline resulted in a precipitous drop in gross margins, which fell to 30.3% compared with 37.6% the prior year as the company took higher mark downs and took pricing actions to shift to more of an every day low pricing model.
Undeterred by the sales weakness, Johnson said the company was confident that the benefits of a simplified business model would more than offset the sales decline and enable the company to meet or exceed its exceed earnings guidance.
For the year, the company said total sales decreased 2.8% to $17.3 billion and online sales were essentially flat at $1.5 billion. The company reported an operating loss for the full year of $2 million, which included $451 million of restructuring and management transition charges.
Good results in search of greatness around the globe
Profits grew faster than sales at Walmart’s international division last year, despite investments to drive record expansion and inventory growth, as EDLP took hold in more markets.
International sales increased 13.1% to $35.5 billion from $31.4 billion, however those figures included $2.4 billion in sales related to acquisitions and a negative $1 billion impact from currency exchange. Remove those variables from the equation and international sales increased 8.5% to $34.1 billion. A similar effect played out when looking at the numbers for the full year. Sales increased 15.2% to $125.9 billion and included $4.7 billion related to acquisitions and $4 billion favorable impact from currency exchange. International sales increased 7.2% on a pre-acquisition, constant currency basis to $117.1 billion.
Profits grew at a faster pace. Fourth-quarter operating income increased 15.2% to $2.3 billion, and full-year operating income increased 10.8% to $6.2 billion. On a constant currency basis, operating income in the fourth quarter was negatively affected by $101 million, and for the full year it was favorably affected by $105 million.
Walmart International president and CEO Doug McMillon characterized those results as good and noted that 2011 was a record year of organic growth with 612 new units added and the coming year would bring more of the same with the addition of 26 million to 28 million square feet of new selling space.
“Our new store development is focused on high-growth markets, such as Mexico, China, and Brazil,” McMillon said. “We continue to pursue the middle income customer in these markets. As more families enter the middle income bracket, they want more variety, but they remain sensitive to value. So we position our assortments, locations and format selections to capture this growth. Our mission of saving customers money so they can live better resonates with them.”
Such rapid expansion has resulted in inventory growth at a rate faster than sales which isn’t a good situation and something McMillon said the company is looking to correct through a cross country best practices sharing approach referred to as “powered by Walmart.” Inventories grew by 18.6% and that is on a constant currency basis excluding acquisitions.
“We finished the year with momentum and our commitment to increasing returns for our shareholders remains,” McMillon said. “We’re in a great set of markets, and we have established the foundation to drive growth this year.”