The bad news keeps getting worse for the struggling department-store chain that on Friday reported a wider third-quarter loss than Wall Street expected on a nearly 27-percent drop in revenue. That marks the third consecutive quarter of big losses and sales declines as customers continue to show that they’re unhappy with Penney’s decision this year to ditch hundreds of coupons and annual sales in favor of everyday low pricing.
The poor results underscore the challenges facing Penney’s CEO Ron Johnson, the former Apple Inc. executive who was brought in a year ago to turnaround the struggling retailer. Since then Johnson, who masterminded Apple’s popular retail stores, has been working to change everything at Penney’s, from its stores to its merchandise.
Penney is starting to see some positive results from its makeover of stores with sectioned-off shops that feature different brands. The company said the reception has been warm to the 10 mini-shops that it rolled out this fall, including those for Levi’s brand and Penney’s new JCP line of casual clothes. But the continuing negative response to the company’s everyday low pricing strategy has more than offset the boost.
During the third quarter, revenue at stores opened at least a year plummeted 26.1 percent. That’s higher than the 17.6-percent drop analysts had been expecting for the figure, which is considered a key measure of a retailer’s health because it excludes the impact from stores opened and closed during the year. Customer traffic dropped 12 percent from the year-ago period.
“I expected horrific but this was worse than expected,” said Brian Sozzi, a chief equities analyst for research firm NBG Productions.
Johnson has acknowledged for months that the plan has been more challenging than he expected. During an investor meeting, held on Friday in New York following the release of the third-quarter results, Johnson said he’s still confident that the plan will work. However, he said he’d continue to make tweaks in order to ensure it will be successful.
“Job No. 1 is to return to growth next year. Let’s make no mistake about it. This is a year where we said we are willing to let the sales drop to establish a new base for the new JCP,” he said Friday. “We have to return to growth.”
That’s the same tone Johnson has maintained since he rolled out his ambitious plan to change the way people shop. On Feb. 1, Johnson’s launched the new pricing that was designed to wean customers off the markdowns they’d become accustomed to, but that ultimately eat into profits.
He got rid of the nearly 600 sales Penney offered at various times throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, offered monthlong deeper discounts on select items and periodic clearance events throughout the year. He also got rid of the word “sales” from the company’s marketing and rolled out colorful ads that featured dogs and children.
But as Penney’s coupons and sales disappeared, so did its customers. The company recorded a big loss on a 20-percent drop in revenue in the first quarter. That was seen as a referendum on how customers felt about the new pricing, and Johnson decided to make some changes to his plan.
Six months after he rolled out Penney’s plan, Johnson tweaked pricing again. On Aug. 1 — just days before Penney posted another big loss on a second straight quarter of disappointing revenue — Johnson eliminated one tier of the pricing plan, the monthlong sales.
He also brought back the word “clearance” to Penney’s sales events and tweaked ads to better communicate the company’s pricing. Rather than whimsical TV commercials with kids and pets, for instance, the new spots have focused more on the merchandise Penney has to offer.
Johnson on Friday said one big factor that dragged down the latest quarter’s sales was the elimination of its monthlong discounts, which he says confused shoppers who like to compare prices. Johnson said Penney lost $20 million a week in sales associated with getting rid of the monthlong discounts for a total sales loss of $260 million for the quarter.
So Johnson said on Friday that he’ll tweak again. Penney won’t be bringing back the monthlong sales, but it now will begin displaying on price tags the “suggested” price from clothing and other manufacturers along with Penney’s “everyday” price.
Johnson also said that company will have a big sale on the day after Thanksgiving known as Black Friday — the traditional start of the holiday shopping season and a time when retailers can make up to 40 percent of their annual revenue. The company declined to comment further, but said it expects to release details on Monday.
“Each quarter, we learn a lot. We adapt. We try to move forward,” Johnson told investors on Friday.
Johnson also spent time on Friday touting that the 10 shops that Penney has rolled out this fall have been well received. The company said so far that it has converted about 11 percent of the floor space. That area has generated $269 per square foot — or more than double the revenue generated in the rest of the store. It plans to bring in Martha Stewart, Michael Graves and others next spring.
The company plans to add 100 shops inside 700 of its 1,100 stores by 2015. The remaining 400 stores are in small towns and won’t feature the full makeover. Surrounding those shops will be extra-wide aisles that Johnson calls “streets.” Along those pathways will be ice cream and coffee bars and wood tables with built-in iPad tablet computers shoppers can use. In the middle of it all, a Town Square will offer activities like Pilates.
Ultimately, analysts say that the success of Penney will depend on whether the company can make its stores fun places to shop. But the retailer still has a long way to go toward revamping its business.
Penney, based in Plano, Texas, said it lost 56 cents per share, or $123 million in the quarter ended Oct. 27. That compares with a loss of $143 million, or 67 cents per share, in the year ago period when results were dragged down by costs related to the management transition and a voluntary retirement program. Revenue dropped 26.6 percent to $2.93 billion in the quarter. Analysts had expected a 15 cent loss on revenue of $3.27 billion.
On the news, Penney shares fell 5 percent, or $1.05, to close at $20.64. Investors, who initially sent Penney shares soaring 24 percent to about $43 after the company announced the pricing plan in late January, have pushed them down nearly 40 percent since the beginning of the year.
Sozzi, the analyst at NBG Productions, said even if investors — and Penney’s board — are worried, they’ll likely give Johnson more time to see if his strategy will work because the company is beginning to see some results.
“The parts of the store that he has touched are working,” he said. “There still hope priced in the stock.”
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