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More pain before long-term gain at JCP

If JCPenney CEO Ron Johnson is concerned by a 21.7% second-quarter same-store sales decline and a worse-than-expected loss, it wasn't evident Friday morning.

The retailer said sales for the second quarter ended July 28 declined 22.6% to a little more than $3 billion, resulting in a $147 million loss, or 67 cents per share. After adjusting for $159 million in restructuring charges, the company reported a loss of $81 million, or 37 cents per share. The 21.7% comp decline follows a first-quarter decline of 18.9%.

Sales were negatively affected by the company's decision to significantly reduce its marketing activities during the latter half of the quarter, as it made adjustments to a pricing strategy implemented at the beginning of the year that confused shoppers. Meanwhile, gross margins suffered as the company lost leverage on sales and continued the process of clearing merchandise as part of its broad transformation. The company’s gross margin rate stood at 33.2%, compared with 38.3% the prior year.

“We have now completed the first six months of our transformation and while business continues to be softer than anticipated, we are confident the transformation of JCPenney is on track,” Johnson said. “The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course.”

On Aug. 1, the company shifted from its three-tier pricing model launched at the beginning of the year to a truer version of an everyday low price strategy that involves everday prices and clearance prices.

“This month we simplified our pricing, launched the first of our new shops, and accelerated our marketing efforts to focus on brands, products and value. Early response to these efforts has been very encouraging,” Johnson said.

During a live conference call, Johnson and CFO Ken Hannah went to great lengths to reassure investors the company has ample cash on hand and other liquidity measures in place to see it through the transformation process.

The company ended the quarter with $888 million in cash and an untapped $1.5 billion line of credit backed by $3 billion worth of inventory.

Hannah said the company expects to be able to fund its multiyear process of converting stores to a series of shops with well known brands through cash generated by operations.

“We currently aren’t using this line of credit at all,” Hannah said, “But we have access should we need it.”

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