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Penney announces profit—and plans to downsize store fleet

BY Marianne Wilson

J.C. Penney on Friday announced plans to close stores and reduce its workforce even as it reported its first profit since 2010.

In one of its deepest cuts to date, the retailer said it will close 130 to 140 stores, which represent about 13% to 14% of its total, 1,014 store base. The locations to be shuttered are unprofitable, Penney said, and generated less than 5% of total annual sales.

The retailer will release the list of planned store closings in mid-March, with most of the locations expected to close over the next few months.

Penney CEO Marvin Ellison said the chain’s decision to close stores will allow it raise the overall brand standard of the company and allocate capital more efficiently.

“We believe closing stores will also allow us to adjust our business to effectively compete against the growing threat of online retailers,” he said. “Maintaining a large store base gives us a competitive advantage in the evolving retail landscape since our physical stores are a destination for personalized beauty offerings, a broad array of special sizes, affordable private brands and quality home goods and services. It is essential to retain those locations that present the best expression of the J.C. Penney brand and function as a seamless extension of the omnichannel experience through online order fulfillment, same-day pick up, exchanges and returns.”

Analyst Neil Saunders, managing director of GlobalData Retail, called Penney’s store closing plans aggressive and sensible.

“At a stroke it will improve JCP’s same-store sales numbers as these outlets are the ones dragging down the company’s performance,” he said. “It will also allow the group to direct capital and resources to the stores which have the best prospects of delivering profitable growth. With a slimmed down store portfolio, JCP will be able to focus on making its remaining stores more of a destination.”

Penney will take a pre-tax charge of about $225 million to cover lease terminations, non-cash asset impairments and transition costs related to the store closings. The closings will result in an annual cost savings of $200 million

In addition, the retailer will close a distribution center located in Lakeland, Fla. and a supply chain facility in Buena Park, Calif. The chain is also launching a voluntary early retirement program to 6,000 eligible employees across the company.

"We understand that closing stores will impact the lives of many hard working associates, which is why we have decided to initiate a voluntary early retirement program for approximately 6,000 eligible associates,” Ellison said. “By coordinating the timing of these two events, we can expect to see a net increase in hiring as the number of full-time associates expected to take advantage of the early retirement incentive will far exceed the number of full-time positions affected by the store closures.”

Penney reported a better-than-expected profit of $192 million, or 61 cents a share, for the fourth quarter, compared to a loss of $131 million, or 43 cents a share, in the year ago period.

Total sales fell 0.9% to $3.96 billion from $4 billion last year, slightly worse than expected.

Same-store sales fell 0.7%.

“Although JCP ended its fiscal year with a shrink in sales, it can take some comfort from the fact that the decreases are modest and that it managed to outperform its main department store rivals,” commented analyst Saunders. “Indeed, it is notable that unlike Macy’s and Kohl’s, JCP’s sales numbers come off the back of fairly strong positive growth in the prior year. As such, while we would stop short of calling these results a triumph, they are certainly an achievement of sorts.”

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