FINANCE

J.C. Penney Q1 loss widens; sounds tariff warning

BY Marianne Wilson

J.C. Penney on Tuesday reported a first-quarter loss wider than the Street expected, warned about the potential impact of new tariffs, and revealed new in-store enhancements.

On the chain’s quarterly call with analysts, CEO Jill Soltau said that the three round of tariffs that have gone into effect to date have had a “minimal impact” on Penney’s business. But she issued a warning about the proposed new round of 25% tariffs on roughly $300 billion in Chinese goods that would include apparel and footwear.

“In looking ahead, we do anticipate a more meaningful impact on both our private and national brands if the potential fourth tranche of tariffs does go into effect on all Chinese imports,” she said.

On the same call, Soltau, who took the reins as Penney’s chief executive last year, said Penney has launched a new checkout process to streamline tasks and enhance the customer experience, which translates into a shorter wait time at checkout. The retailer also has tested a new centralized pickup and returns area with plans to expand this concept to 500 stores during the second quarter.

“This not only makes the in-store experience better, but it’s a step toward a better omnichannel customer experience as well,” Soltau said.

Penney’s net loss for the quarter was $154 million, or ($0.48) per share, for the quarter ended May 4, compared to a net loss of $78 million, or ($0.25) per share in the year-ago period. Adjusted net loss was $147 million, or ($0.46) per share. Analysts had expected an adjusted loss of $0.39.

Total net sales decreased 5.6 % to $2.44 billion, better than the $2.48 billion analysts had expected, from $2.58 billion last year. Same-store sales decreased 5.5%.

The exit of the major appliances and in-store furniture categories had a combined negative impact of 20 basis points to comparable sales in the quarter, according to Penney.

In a statement, Soltau said was pleased with the strides the company has made in setting key objectives, building its senior leadership team and executing significant changes in its assortment, including eliminating major appliances.

“We have made good progress on each of our immediate action steps highlighted last quarter, including our continued efforts to reduce and enhance our inventory position, which resulted in a 16 % reduction in our inventory and a meaningful improvement in our free cash flow this quarter,” said Soltau. “As our inventory rationalization effort continues, we are testing a number of strategies around optimal inventory levels and assortment choice counts with a goal of delivering an improved experience for our customers and maximizing our return on investment.”

The retailer expects to be free cash flow positive for fiscal 2019.

Soltau said that Penney is working “to reestablish the fundamentals of retail’ at the company and building capabilities to satisfy the wants and expectations of its customers.

“First, we are continuing to map out a comprehensive long-term strategy for J.C. Penney, which we look forward to sharing in the coming months,” she said. “Second, we are working quickly to build a talented and accomplished team of retail experts. J.C. Penney is an American retail icon that is very important to all of our stakeholders, and I am encouraged by the early signs I am seeing in our business as we work to realize the potential that lies ahead.”

In comments, Neil Saunders, managing director, GlobalData Retail, said he remains impressed with Soltau, noting that she has taken decisive action to find and build a strong team with good experience. Looking ahead, his main concern is not that she will fail to take action or make the right decisions, he said, but that the company will run out of time and capital to make the necessary changes.

“J.C. Penney is a very weak operator in one of the toughest sectors of a highly competitive retail market in an era of more subdued demand from highly fickle consumers,” he said. “Put bluntly, the odds are firmly stacked in favor of failure.” (For more analysis, click here.)

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