Solid Sales at J.C. Penney but More Pain at Macy's

By Markets Fool.com

Last week, two of the top mid-price department store chains in the U.S. -- Macy's and J.C. Penney -- provided updates on their holiday sales performances. They showed a sharp contrast. J.C. Penney, which was close to bankruptcy two years ago, is on the rise again. Meanwhile, Macy's has fallen into a deep rut this year.

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J.C. Penney will meet its target
After posting steep comparable-store sales declines in 2012 and 2013, J.C. Penney finally returned to growth in 2014, with comp sales up 4.4% for the full year. In its Q4 earnings report issued last Feburary, J.C. Penney set a goal of maintaining that trajectory, with comparable-store sales growth of 3%-5% in fiscal 2015.

In May, J.C. Penney narrowed its guidance to the high end of the original range, calling for 4%-5% comp sales growth. Through the first three quarters of the year, J.C. Penney increased comp sales by 4.6% year over year, putting it right on target.

J.C. Penney has returned to consistent sales growth.

For the November-December holiday period, J.C. Penney announced that comparable-store sales rose 3.9% year over year. This puts the company on track to hit its targets, with full-year comp sales growth of roughly 4.3%-4.5%. While J.C. Penney didn't provide specific guidance for its holiday sales, its results appear to have been roughly in line with plans.

Like other department stores, J.C. Penney was negatively affected by warm-weather trends across the country. However, it was able to meet its targets thanks to strong sales for its private brands and growth in its e-commerce operations, which had languished under former CEO Ron Johnson.

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Thus, management's turnaround efforts appear to be working. In the face of a tough retail climate, J.C. Penney's strong performance can't be written off as the product of easy comparisons or a favorable market.

Macy's swings the other way
Macy's entered the 2015 fiscal year with comparatively modest expectations for 2% comparable-store sales growth. However, it hasn't even come close to reaching that level of performance. Through the first three quarters of the fiscal year, comparable-store sales declined 1.7%, including both owned and licensed departments.

The trend has worsened in the fourth quarter. In November, Macy's projected that comp sales would decline 2%-3% this quarter. However, comp sales fell 4.7% (including licensed departments) for the combined November-December period. Macy's doesn't expect January to turn out any better. As a result, full-year comp sales will decline about 4.7% year over year.

Macy's sales slipped into reverse in 2015.

Macy's has trotted out a slew of explanations for its underperformance. Throughout the year, it has been hurt by the strong dollar, which has reduced tourist spending. In the first half of the year, an organizational restructuring caused some short-term disruptions. More recently, it has been hurt by weak sales of cold-weather items due to unseasonably warm weather patterns.

Yet Macy's clearly confronts deeper challenges, as the rise of e-commerce and off-price retailing are disrupting shopping trends. As a result, Macy's management thinks it could take years for the company to return to the level of profitability it achieved just last year.

Time for belt-tightening
For all of its troubles, Macy's still has one big advantage over J.C. Penney: It is profitable. J.C. Penney will need at least one or two more years of solid sales growth to return to profitability on a full-year basis.

Nevertheless, Macy's is already a whole lot less profitable than it was in 2014. As a result, it is looking to shed costs aggressively in 2016.

Last week, Macy's announced 36 store closures scheduled for the next few months. The company is also reducing staffing by an average of three to four employees per store, cutting dozens of management positions, and eliminating hundreds of back-office jobs. These thousands of job cuts will reduce annual spending by about $400 million.

Over the past four years, as it has adjusted to a smaller sales base, J.C. Penney has slashed its operating expenses by nearly 25%. This suggests that Macy's probably has plenty of room to reduce expenses even beyond the $400 million in cost cuts it has already outlined. Getting costs under control will be key for a potential turnaround at Macy's.

The article Solid Sales at J.C. Penney but More Pain at Macy's originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. 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.