Amid 11.9 Percent Declines in Total and Comp-Store Sales, Dot-com Emerges as "Bright Spot" for JCP

J.C.Penney reported an 11.9 percent drop in second-quarter sales to $2.6 billion compared to $3.02 billion in the same quarter last year, and comp store sales slid by 11.9 percent as well.

Traffic declined 5.5 percent during the quarter and store conversion was also down by 4.9 percent year over year. CFO Ken Hannah noted that stores not under construction during the prolonged home-department renovation showed conversion that remained flat year-over-year.

Despite the less-than-stellar numbers, the retailer pointed to its e-commerce performance as a bright spot. Web sales totalled $215 million, down 2.2 percent year over year, according to Hannah, though July e-commerce sales were 14 percent higher than the second quarter of 2012.

"We dropped about $0.5 billion in Internet sales last year by disconnecting the merchandize assortments from the online assortments," said CEO Mike Ullman, speaking on a call with analysts, "so the fact that they were not congruent made it very difficult for store associates to access online to get additional merchandize for their customer or to put that on order. By reconnecting and realigning the merchandize assortments, the business popped almost immediately."

The CEO stressed that management is "encouraged" by the steadily increasing number of store referrals to "We most recently were just cited in a Wall Street Journal study [that said] we had the second-best Back-to-School online business behind Walmart; that tells us we're back in the game and we expect to be in the game all the way through the rest of the year," Ullman added. While JCP achieved incremental improvements in each category in the online business, the retailer said the numbers can be even better.

"We have re-integrated store and online buying, planning and allocation and improved our merchandize assortment and in-stock levels across sizes and styles, and we have reconfigured many of the user interfaces to make it easier to shop," Ullman reported.

All checked out for Back to School
JCP beefed up its checkout stations ahead of the back-to-school shopping season, deploying 2,800 mobile carts and restoring 1,400 fixed cash registers — more than 1,000 additional checkout points compared with the year prior.

What's more, the retailer is making it easier for shoppers to spot store associates. Employees on the store floor now sport red branded lanyards, name badges and branded cross-body pouches that house mobile POS devices.

Righting inventory wrongs
JCP admits that its inventory levels won't be restored until some time in the fourth quarter. "Coming into the second quarter, we [were] going to be out of stock in key basic items," explained Ullman. "We spent the last three months getting back in stock what customers need, and we fully expect to be in great shape by the fourth quarter."

St. John's Bay, previously a billion-dollar private brand for JCP, remains at inventory levels insufficient to satisfy customer demand, according to the CEO, with just about half the product in stock that customers are seeking. "As with all our key item basics, we expect to be back in stock in St. John's Bay in the third quarter," said Ullman.

The retailer also undertook a size and style refresh of its in-house Arizona brand in 2012 in advance of 2013's back-to-school season. "The team started working last year to improve the style and fit of our Arizona assortments and increase our inventory levels in time for back-to-school this year," Ullman explained. Many stores will feature Disney shops in the children's department this fall, he added.

Restoring rewards
JCP can't bring back its three-tier rewards program — which Ullman describes as "a successful sales driver" — quickly enough. The CEO cites the program as a key component in building customer loyalty. "We are reissuing all of our J.C.Penney credit cards during the month of October and that will be the time we'll also message the three tier program," said Ullman. "I really can't explain why it had been dropped because customers really do respect the fact that they can earn a higher level of recognition by more loyal purchasing with us."

Reenergizing the brand
With an August start date, JCP hired longtime brand strategist and former Kraft executive Debra Berman as senior vice president of marketing, a position that had remained vacant for 14 months. "She's in charge of how do we resonate and get our message deep down into our brand heritage," explained Ullman.

The chief executive described JCP as "underdeveloped" in its social and digital offerings for customers, areas that Berman's team is focused on improving in coming months.

Technology slowdown
JCP is operating with an interim CIO, though Ullman is confident a new permanent executive will be hired "before this fall." "We have not stepped back from the enterprise software improvements," he explained. "We replaced our 40-year-old general ledger in the last quarter, so we're making improvements that will help us run the business, but we're not trying to win awards for the most exotic technology in a store."

Reversing a losing strategy
Ullman lamented the damage that ousted former CEO Ron Johnson's controversial retail strategy — which did away with promotions and coupons and called for new upscale merchandise — has done to the 110-year-old department store chain. "We actually attracted fewer new customers in 2012 than any of the other previous 10 years," said Ullman. "We actually lost more customers than we gained."

The road to a recovery will be a long one and the obstacles for JCP are many. "We have a damaged and impaired business that we're turning around," Ullman concluded.

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