Struggling retailer JC Penney reported increasing comparable sales Wednesday morning and shares went up despite the company’s widening losses.
Third quarter revenue came in at $2.78 billion, less than the $2.93 billion it sold last year. The kicker for the share price rally was a 0.9 percent increase in same-store-sales in October, a measure seen as the purest reflection of retail sales trends.
The company is confident. “Our strategies to reconnect with customers are beginning to take hold, and this became increasingly clear as the quarter progressed,” stated Mike Ullman, JC Penney Company Inc. CEO.
Ullman said in a conference call that fourth quarter and various initiatives were off “to an encouraging start.” Furthermore “meaningful promotions” helped to entice customers to go back to JC Penney. In short, the company is slashing prices to sell more stuff, after a previous strategy to reduce sales failed.
Since his reinstatement in April, Ullman has been trying to win back customers who had left because of changes made under the previous CEO Ron Johnson. Ullman was JC Penney’s CEO before, and came back after Ron Johnson was dismissed earlier this year.
Lifestyle Change
The Home department, for example. has traditionally been 20 percent of the retailer’s business but is now down to about 10 percent.
Ullman said this was because the previous efforts to be more modern left the customers with fewer choices.
“We need to rebalance the lifestyle mix,” he said on the call. Ullman said there had been a lack of opening price products and customers couldn’t tell what was new, what was good, better, and best. He added they had plans for restoring the business in fragrance and gifting as the holidays approach.
There are currently 10 initiatives to rekindle sales in this department.
Burning Cash
Despite the optimism, the company continues to lose money. The net loss for its last fiscal quarter was $489 million. Given continuing losses, the company has to successfully turn around or face a liquidity crunch sometime next year.
JC Penney said its totally liquidity is $1.71 billion against the $5.6 billion debt at the end of the quarter. The company expects total available liquidity to be over $2 billion at the end of the year.
The retailer had borrowed $3 billion this year trying to fund its turn-around strategy. However, the share price has dropped 78 percent since last February investors were still optimistic about Johnson’s plans.
Hedge Funds
Different views about the company’s CEO and strategies got different hedge funds into the stock.
Activist investor Bill Ackman’s vocal enthusiasm ultimately led to disappointment and he closed out his position at a substantial loss in August. Glenview Capital Management and Perry Capital had also been optimistic the company could recover but sold off shares the past quarter.
Others like Jana Partners, investor George Soros, and Avenue Capital Group still have hope.
“In J.C. Penney, we believe there is a 75 percent chance of it working out,” said Marc Lasry of Avenue Capital Group this week at the Reuters Global Investment Summit in New York.
“The whole play on J.C. Penney is, when does the cash burn stop ... Our view is it’s sort of a six-month or one-year process, but you have the luxury of time because of that cash,” Lasry said.
Lasry said the company’s balance sheet allows for a five year turnaround, and it looks like they would only need one or two.
