Penney posts wider Q2 loss, but cites positive signs
DALLAS —J.C. Penney Co. posted a wider-than-expected loss in the second quarter on a nearly 12% drop in revenue. But even though Penney’s results were worse than expected, there were small signs that interim CEO Myron Ullman may be starting to stop the bleeding related to former CEO Ron Johnson’s failed transformation of the chain.
The quarter was the first entirely under the watch of Ullman, who returned to Penney in April to undo the strategy put in place by Johnson, who planned to transform Penney stores into a series of branded in-store shops.
"Since I returned to J.C. Penney four months ago, we have moved quickly to stabilize our business —both financially and operationally —and we have made meaningful progress in important areas of the business,” Ullman said in a statement. “There are no quick fixes to correct the errors of the past. That said, we have identified the challenges, put solid plans in place to address them and have experienced and capable people in key roles to do so."
Penney lost $586 million for the three-month period ended Aug. 3, compared with a loss of $147 million in the year-ago period. Revenue for the quarter fell 11.9% % to $2.66 billion from $3.02 billion in the year-ago period, less than the 23% drop in the same period last year. It was the company’s ninth straight sales drop.
Same-store sales were down 11.9%, worse than the 8.3% analysts expected, but better than the 22% decline a year earlier.
The second quarter saw the unveiling of Penney’s revamped home department in some 500 stores, an effort that was spearheaded by Johnson. Echoing what many analysts have been saying, Penney said the new home strategy has not resonated well with consumers. The retailer is working to make the departments more appealing to its shoppers, and has begun restaging the departments by category.
“For example, early feedback has made it clear that customers would prefer a more balanced assortment between traditional and modern home furnishings, a better selection of good, better and best price points across key items, and would prefer to see certain merchandise arranged by category rather than brand,” Penney said. “The testing of this modified shopping environment has shown significant improvement in performance.”
Penney said that the back-to-school season is off to an "encouraging" start. “Moving forward, we’re focusing our efforts on regaining customer loyalty by offering trusted brands, award winning service and affordability that families can depend on,” Ullman said. “We are encouraged by our early performance this Back-to-School season, which reflects customers’ growing confidence in the brands and styles we offer.”
Ullman has been in a tough spot since he returned to bring a measure of stability to the troubled chain. He has increased discounts and promotions and run ads apologizing to Penney’s customers while, at the same time, he has had to work with Johnson’s costly store remodels.
In addition, most recently he fought off a challenge from Penney’s largest stakeholder, William Ackman Pershing Square Capital Management, who wanted to replace Ullman with a permanent CEO faster than his fellow directors thought was necessary. Ackman also called for a new board chairman. Last week, Ackman resigned from the board, which gave its full support to Ullman.
Penney ended the quarter with $1.5 billion in cash and cash equivalents. Taking into account additional funds available under the credit facility, the company`s total available liquidity is $1.85 billion.
Dick’s takes rare tumble
Worse than expected second quarter sales results at Dick’s Sporting Goods sparked new consumer spending concerns and prompted the company to lower its full year profit forecast.
Dicks said sales for the quarter ended August 3, increased 6.6% to $1.5 billion, however same store sales fell 0.4%, versus a planned 2% to 3% increase, when adjusted for a 53rd week in 2012. Profits for the period totaled $84.2 million, or 67 cents a share, compared to $53.7 million, or 43 cents a share.
"Our second quarter results were below our guidance as a sluggish consumer environment along with higher levels of precipitation and cooler temperatures contributed to a decrease in traffic, resulting in lower than expected same store sales," said Ed Stack, Dick’s chairman and CEO.
The company lowered it full year profit forecast to a range of $2.60 to $2.65 per share.
Stack said the reduced guidance was, “primarily due to lower sales expectations for the second half of the year, which are a result of our belief that consumers will remain relatively cautious. In order to drive traffic and respond to the consumer environment we are increasing our advertising levels, enhancing the customer experience, and investing in growth categories."
Despite the difficulties Stack see in the back half of the year, he characterized the challenges as short term in nature and noted that they do, “not change our view of the profitable long-term growth opportunities for our business."
Dick’s ended the quarter with 527 Dick’s Sporting Goods stores in 44 states and 81 Golf Galaxy stores in 30 states.
Best Buy continues to rally as it addresses declining comp-store sales
Best Buy withstood merchandising related disruptions during the second quarter to achieve on plan sales results and gain momentum heading into the back half of the year.
Domestic revenue of $7.81 billion increased 0.1% versus last year. This increase was primarily driven by the revenue from 57 net new Best Buy Mobile stand-alone stores that were opened predominantly in the third and fourth quarters of fiscal year 2013, partially offset by the comparable store sales decline.
Domestic online revenue was $477 million and comparable online sales increased 10.5% due to increased traffic and higher average order value. Including new gaming console pre-orders, which the company does not expect to ship or recognize as revenue until the fourth quarter of fiscal year 2014, comparable online demand increased more than 16%.
From a merchandising perspective, strong growth in mobile phone and appliances was partially offset by declines in other categories, including gaming and digital imaging.
“In November at our investor meeting, we talked about the two problems we had to solve: declining comparable store sales and declining operating margins,” said Joly. “Since that time, the resolution of these two problems has become our Renew Blue rallying cry and the organization’s goals and objectives have been prioritized accordingly. While we are clear there is much more work ahead, we have made measurable progress since we unveiled Renew Blue last year, including near flat comparable store sales, substantive cost take outs and better-than-expected earnings in the past three consecutive quarters.”
“As we look forward to the back half of the year, we are encouraged by the momentum that is being driven through the execution of our Renew Blue priorities,” added Sharon McCollam, Best Buy EVP, CAO and CFO. “To build on this momentum and to position us for a strong Q4 FY14 and FY15, our Q3 and Q4 FY14 investment plan, as previously discussed, includes ongoing pricing and SG&A investments related to the following Renew Blue initiatives: price reductions to further enhance Best Buy’s price competitiveness where needed; increased marketing costs to support growth in the mobile category; improvements in the multichannel customer experience; optimization of our retail floor space; and the re-platforming of bestbuy.com. The SG&A component of these investments is inclusive of the $150 to $200 million incremental SG&A that was announced earlier this year.”
International revenue of $1.49 billion declined 2.9% versus last year. The decline was due to the loss of revenue from 15 large format stores that were closed last year in Canada and a comparable store sales decline of 1.8%. Comparable store sales were negatively impacted by lower demand for consumer electronics and ongoing competitive pressure in Canada, partially offset by increased consumer demand in China due to expiring government subsidies that were supported by increased promotional offers.
During the second quarter, Best Buy completed the sale of its 50% interest in Best Buy Europe and received proceeds of $526 million in net cash upon closing and $123 million in cash proceeds from the subsequent sale of the Carphone Warehouse ordinary shares received as part of the consideration for the sale. The company will also receive approximately $39 million in deferred cash plus interest on both the first and second anniversary of the closing.