Why Macys Thrives While J.C. Penney Dives

By Markets Fool.com


Original Photo: Mike Mozart via Flickr.

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Considering the way the market reacted to J.C. Penney's fourth-quarter earnings news, you'd think the bottom had fallen out of its turnaround story. While the retailer missed earnings estimates by a wide mark -- breaking even on adjusted net income while analysts had anticipated an $0.11 per share profit -- the rest of the report wasn't all that bad. In fact, it was quite good.

A recovery still in progress
Sales continued to rebound, rising more than expected; gross margin fattened further; and comparable-store sales rose higher than forecast in the company's guidance, and at a greater rate than either Macy's or Kohl's , suggesting J.C. Penney was luring away at least some of their customers.

The retailer also continued to bring its inventory levels under control, noting they fell by more than 9% from the year-ago period when the department store chain put tons of merchandise on clearance. That drove traffic to its stores, but also killed margins, and J.C. Penney has been working to rightsize its inventory ever since.

A strong holiday season, particularly in comparison to Macy's struggles to make sales, put J.C. Penney in a better position for the current year. Revenue from the company's online store also spiked by 12.5% in the quarter, and J.C. Penney expects to grow comparable sales by 3% to 5% for the coming year, a much cheerier outlook than the cautious note Macy's sounded.

Meanwhile, Macy's sales were up just 1.8% in the quarter on comps growth of 1.4%, and it intends to launch new initiatives to spark growth, including an off-price outlet concept and going international.

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Yet the market punished J.C. Penney's stock, sending it tumbling over 13% in the aftermath of the earnings report. But should this really surprise investors?

A hint of what was coming?
Maybe we should have seen this coming. Not necessarily from J.C. Penney's quarterly reports, but rather from changes in perception as recently revealed in the American Customer Satisfaction Index, an annual report gauging the opinions of 70,000 consumers across the country on how they view their shopping experiences at retailers across a broad spectrum of considerations, including the following:

  • Convenience of stores and hours
  • Frequency of sales and promotions
  • Variety and selection of merchandise
  • Layout and cleanliness of stores
  • Ability to provide brand names

In all, there are 10 different categories; on average, discount and department store operators scored 77 out of 100, and the winners and losers might not surprise you.

Customers remain priority No. 1
Considering its reputation as a stickler for customer service, it's not surprising that Nordstrom topped the list with a ranking of 86. It also shouldn't raise any eyebrows that Wal-Mart came in dead last with a score of 68, since the largest retail operation is also the one people love to hate.

Meanwhile, J.C. Penney fell in this year's survey to rank just in line with the industry average. Its score dropped 3% from last year, while Macy's jumped 4% from 2013, to score a 79.

That's not insignificant: ASCI found there is a correlation between companies with high levels of customer satisfaction relative to their competitors tending to have higher earnings and stock returns.

After their respective financial reports, Macy's stock rose while J.C. Penney's plunged. The ASCI report might have been a hint of what was on the horizon.

What it means for investors
But I wouldn't necessarily worry too much yet about the long-term implications. As noted above, despite the big earnings miss in the last quarter, J.C. Penney's is on much more firm financial footing than it has been in some time.

It's true that much the momentum J.C. Penney built up through the year seemed to begin petering out toward the end of 2014. Yet it still finished the year with about $2.1 billion in liquidity.

J.C. Penney's stock was up 20% over the past month and had gained some 53% over the past year, before it collapsed after the earnings report. As the department store has rebooted its doorbuster sales policy, reintroduced its popular catalog (albeit a slimmed-down version), and brought back many of the fashion labels its customers sought, it wouldn't be surprising to see not only its stock price rising once more, but also for the company to regain its place among industry leaders on the ASCI customer satisfaction survey.

The article Why Macys Thrives While J.C. Penney Dives originally appeared on Fool.com.

Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. Heowns shares of J.C. Penney Company. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.