Guess what? JC Penney is now ahead of the curve

JCP revenues fall short, lowers profit margin outlook

To all you department store critics who argue these "dinosaurs" are all the same, boring shops that give you no reason to get off the couch: J.C. Penney hears you loud and clear.

On a call with analysts following its mixed first-quarter results, which sent the company's shares lower, CEO Marvin Ellison outlined how the retailer is positioning itself to connect with a new era of shoppers, whom many argue are no longer interested in visiting department stores.

That strategy includes lessening the company's dependence on weather-sensitive categories such as apparel, and beefing up its offerings in areas that can't easily be replicated online or duplicated by others in the space. Namely, Penney is expanding its Sephora shop-in-shops, accelerating its InStyle beauty salon rollout, and pushing forward with its tiptoe into appliances.

Beauty products are a key initiative for driving store traffic because cosmetics can't be tested online, not to mention that it's impossible for a computer to give you a hair cut. Beauty items also require frequent replenishment. As for appliances, Ellison argues consumers don't care what the thermometer reads when it comes time to purchase a new stove or refrigerator, which will help protect the company from wild weather-related swings.

Customers browse the make-up area at a Sephora USA store inside a J.C. Penney store in Brooklyn, New York.
Victor J. Blue | Bloomberg | Getty Images

Penney's changes come as sales at department stores dropped off 3 percent during the first four months of 2016, as consumers choose to spend a greater share of their wallet on home improvement, beauty and experiences. Meanwhile, Sears — the longtime department store leader in appliances — continues to bleed sales.

"We're listening. We're addressing those customer needs," Ellison told analysts.

Last year, women's apparel accounted for 25 percent of J.C. Penney's sales, with men's apparel and accessories chipping in 22 percent, and children's apparel 10 percent. Home, a category that has been a particular focus for Penney's management, only accounted for 12 percent. Back in the mid-2000s, before the company's failed reinvention strategy, home accounted for more than 20 percent of Penney's business.

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One of the biggest bets is its decision to move forward with its appliance test. The retailer began piloting this concept earlier this year with 22 locations, and plans to roll it out to roughly half of its 1,000-plus stores later this year.

During its testing phase, Ellison said, more than one-third of the category's shoppers were new to the store, and the average transaction was more than $1,200. That helped lift comparable sales in the pilot locations, Ellison said.

The push into appliances also comes as Sears' revenue continues to nosedive. However, the Penney's competitor is not throwing in the towel. Despite Sears' cratering revenues, appliances have remained a key selling point for its shoppers. Earlier this week, Sears said that it will test a new free-standing appliance shop, in Fort Collins, Colorado, starting next week.

Penney's also plans to improve its home offerings by expanding its exposure to window treatments, a category in which it led before its failed turnaround efforts.

Despite Penney's ambitions and relatively solid first-quarter performance to its peers, some analysts noted that the company's comparable sales decline of 0.4 percent — its first such decline since third quarter 2013 — and gross margin contraction were disappointing.

"Considering J.C. Penney's comparisons, it's pretty weak," Citi analyst Paul Lejuez told investors. "The company did a good job of managing (slashing) expenses, and overall EPS and EBITDA came in a little bit better than expected. But for a turnaround story like J.C. Penney, the top-line and gross margin are most important."

Last year, the department store made strides, eking out 3 percent revenue gain, which sent its sales to $12.6 billion. That's well shy of the $19.9 billion it pulled in eight years prior.

Penney nonetheless maintained its forecast for EBITDA of $1 billion this year, and a comparable sales increase of 3 to 4 percent. Ellison cited the company's new initiatives, an improvement in sales trends around Mother's Day and the relatively small sales contribution of the first quarter as the reasons for his confidence.

Despite Penney's disappointing results, it still performed better than its peers. Macy's, Nordstrom, Kohl's and Dillard's all reported their worst same-store sales growth since the Great Recession.