J.C. Penney Co Inc on Friday reported its worst drop yet in same-store sales since Chief Executive Ron Johnson began his radical transformation of the department store chain, overshadowing signs of progress at the new boutiques that are the centerpiece of the project.
Still, Johnson told investors at a meeting in New York that he was "100 percent committed" to his plan for the century-old retailer, which has included eliminating most coupons and sales events and the ongoing conversion of 700 of its 1,100 stores into collections of 100 boutiques, which now include Levi's Denim Bar and upgraded Liz Claiborne areas.
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But the absence of coupons and sales events again kept customers away in the third quarter, with traffic down 12 percent despite efforts to attract shoppers, including free haircuts for kids.
J.C. Penney shares were down 4 percent at $20.81 in morning trading on the New York Stock Exchange, after falling as low as $19.61 early in the session.
Same-store sales fell 26.1 percent in the latest quarter, ended October 27, while analysts had expected a decrease of 17.9 percent. It was a far more pronounced drop than in each of the first two quarters, brought on by sharp markdowns on unsold merchandise, which also decimated gross profit margins.
Walter Loeb, president of retail management consultant Loeb Associates, expressed concern about Penney's performance during the upcoming holiday shopping season.
"I expect a big drop in sales" Loeb said. "(Johnson) must generate traffic. I think he has to be more promotional."
STRONG SALES AT NEW BOUTIQUES
There have been signs that the first few boutique shops have won over customers, generating far more revenue per square foot than what Johnson called the "old JCP."
The company is generating $269 of sales per square foot at the eight boutiques introduced in August and September, which include Levi's and PVH Corp's Izod as well as a new private "jcp" brand, compared with $139 in the old parts of its stores.
In a statement when the quarterly results were made public, Johnson, who took the reins at J.C. Penney a year ago, said this was a "tale of two companies," with the old Penney still struggling and the new stores surpassing his expectations.
But the boutiques, which Penney expects to complete by 2015, and which will eventually house brands such as Martha Stewart, Nanette Lepore and Michael Graves, still represent only 11 percent of the company's selling space in its stores.
Despite the sales hemorrhage, Johnson has the full backing of activist investor William Ackman, whose Pershing Square Capital Management is Penney's largest shareholder and who was at Friday's presentation.
"It's about the shops. That's the future of the company," Ackman told Reuters.
Penney Chief Financial Officer Ken Hannah said the retailer would have $1 billion in cash at year-end and has enough money to execute its transformation. But he also said it could change the pace of the project "at our desire."
Penney made some concessions during the third quarter. Last month it offered a $10 gift coupon, and it recently had a "30 percent off" clearance promotion. But Loeb said the company needs to do much more to win back shoppers who have lost the habit of shopping at Penney.
Penney said its net loss narrowed to $123 million, or 56 cents per share, in the third quarter from $143 million, or 67 cents per share, a year earlier.
Excluding a gain from the sale of noncore assets and other one-time items, Penney said it lost 93 cents a share.
Sales fell 26.6 percent to $2.93 billion.
Internet sales were down 37.3 percent to $214 million. Many retailers are working to increase their online sales.
Gross margin fell to 32.5 percent of sales from 37.4 percent a year earlier.
(Reporting by Phil Wahba in New York; additional reporting by Brad Dorfman in Chicago; Editing by Lisa Von Ahn and John Wallace)