Sunday 6 November 2011

J. C. Penney Co.

Amid the pile of downbeat sales reports for July from retailers, there was a sliver of hope: Second-quarter profits may not be as bad as expected when merchants such as Wal-Mart Stores Inc., Macy's Inc. and J.C. Penney Co. post their results starting this week.

Several companies, from Gap Inc. and Penney to teen retailer Hot Topic Inc., raised their outlooks last week — with help from strict inventory controls and slashing expenses — even as they reported sales declines in July at established stores.

Still, retailers overall are expected to report a fifth consecutive drop in quarterly earnings, according to Ken Perkins, president of research company RetailMetrics LLC. Worries abound about how merchants will stem the erosion of their profits as they confront what could be a deeper spending funk in the critical months ahead.

Among the hardest hit have been clothing stores, which have seen a sales slump worsen in recent months as shoppers buy only what they need. Analysts will be looking for any clues from the earnings reports on when the apparel sector will see a recovery.

The challenge becomes, "how do we drive traffic in a really slow environment?" says Perkins. He expects that his estimate for a 5.7 percent decline in second-quarter profits from a year ago may now be a bit too harsh amid the better outlook many merchants have given. Still, with the economic uncertainty and the cost pressures retailers are facing, he said it's hard to "nail down" a figure.

Nevertheless, the back-to-school season "doesn't look promising," said Michael Appel, a managing director of Quest Turnaround Advisors.

With the benefits of the federal stimulus checks dried up, retailers face even bigger challenges as they try to get shoppers to splurge on skinny jeans and fancy backpacks for their children. Consumers already struggling with high food and gas bills and increasing layoffs are less confident in the economy. And while oil prices have receded a bit, paychecks are not keeping up with overall inflationary pressures on basics.

The reports for July on same-store sales, or those at stores open a least a year, underscored Americans' growing financial strain as shoppers focused even more on buying necessities like detergent and avoided mall-based clothing stores.

Such frugality is creating a wider disparity between low-price operators like Wal-Mart and mall-based chains and department stores. Disappointments in the apparel sector cut across all types of chains from teen retailer Abercrombie & Fitch Co. to department stores such as Penney and Kohl's Corp.

Merchants can't even depend as much on international sales to offset weaker U.S. business as markets in Spain and other European countries are softening as they get dragged down by the slowing U.S. economy.

Analysts will be closely watching Wal-Mart, which has been a beneficiary of the slowing economy but did feel some pain in July. It announced that same-store sales for the month were below analysts' consensus estimates and also predicted slower growth in August. The discounter, considered a barometer of consumers' financial well-being, said that its customers are increasingly unable to stretch their paychecks to the next payday.

That cautious tone caused Mark Miller, an analyst at William Blair & Co., to downgrade shares of Wal-Mart to "market perform" from "outperform" based on expectations for slower sales and profit growth in the second half. In a note to investors, he said that Wal-Mart's July sales performance was a "material deceleration" from the previous two months. Still, he believes the company is on track to meet or exceed Wall Street's current expectations for second-quarter earnings of 84 cents per share when it reports results on Thursday.

Macy's, which no longer reports monthly same-store sales, is expected to post earnings of 19 cents per share when it reports second-quarter results Wednesday, according to Wall Street consensus estimates. Appel said he will be looking for updates on how the company's new efforts to better tailor its merchandise to local areas are faring and whether business has improved at the May Co. stores now converted to Macy's.

Meanwhile, TJX Cos., which sells name-brand labels at a discount, has benefited from shoppers looking for cheaper alternatives than the mall. The company, which is set to report results Tuesday, raised its earnings outlook last Thursday even after reporting that same-store sales fell a bit short of Wall Street estimates.

Penney Still Focusing on Off-Mall Growth

PLANO, TX-As mall vacancies increase, J. C. Penney Co. continues to examine its real estate, relocating stores in underperforming malls to off-mall sites, management said at its second-quarter conference call.

The company’s problem mall stores were closed six or seven years ago, noted Myron E. (Mike) Ullman III, chairman and CEO. The vast majority of Penney’s new stores are in its off-mall format, in part because of dramatic slowdown in new mall development. Relocating to shuttered anchors in malls is being examined closely.

“Given that we want to keep flexible, we don’t want to take someone else’s problem and make it our own,” Ullman said. “There is going to be a lot more consolidation than has been announced, in our view.”

Plans call for opening 35 new or relocated units in 2008. One store originally scheduled for this year has been deferred to 2009. The company also will renovate a total of 20 stores this year. The company will open 12 new stores in the third quarter, 11 of them in the off-mall format. The chain also continues to expand its Sephora in-store makeup boutiques, and will open 10 in the third quarter for a total of 91.

“[Sephora] continues to be one of the strongest aspects of the business and will expand,” said Ken C. Hicks, president and chief merchandising officer

Total sales were $4.3 billion, down 2.5% from the same period last year. Comparable store sales decreased 4.3%. Net income was $117 million, down 35.7% from the previous year.

The company opened 12 new and relocated stores in the quarter, including 11 in the off-mall format. J. C. Penney operates 1,083 department stores throughout the United States and Puerto Rico.