J.C. Penney Gains as Sales Forecast Signals Turnaround Momentum

Feb. 27 (Bloomberg) -- J.C. Penney Co. surged after forecasting an increase in annual revenue and margin expansion, prompting Chief Executive Officer Mike Ullman to predict its turnaround will be completed this year.

Same-store sales will increase by a mid-single digit percentage and gross margin will “significantly” improve this year, the Plano, Texas-based company said yesterday in a statement. Liquidity at the end of 2014 is projected to hold steady at $2 billion, the company said. The shares rose as much as 17 percent in extended trading in New York.

Ullman’s attempt to revive the department-store chain gained traction during a holiday season marked by a discount war among retailers seeking to attract tentative shoppers. Following losses and plummeting sales caused by former CEO Ron Johnson, Ullman returned to the helm in April and helped the chain post its first same-store sales gain last quarter since the period ended April 2011.

“The most important thing Ullman’s done is to give people confidence, whether its vendors, merchants or store employees,” said Paul Swinand, an analyst for Morningstar Inc. in Chicago. “His strategy is not anything earth shattering. It’s just getting back to where they were, working hard and being smart. Not trying to change too much at once.”

J.C. Penney jumped 14 percent to $6.77 at 6:07 p.m. in late trading yesterday in New York, after reaching $6.96. The shares had declined 35 percent this year through the close of regular trading yesterday.

First Profit

The chain also posted its first profit in more than two years in the fourth quarter, benefiting from Ullman returning the company to its traditional discounting strategy and reviving popular private-label brands.

Net income was $35 million, or 11 cents a share, in the quarter ended Jan. 31, compared with a loss of $552 million, or $2.51, a year earlier, the company said. Excluding the sale of assets and tax benefits, such as a $270 million change in the value of its pension, the company posted a loss of 68 cents a share. The average of 24 estimates compiled by Bloomberg was a loss of 86 cents.

The company has spent the past 10 months improving its finances and operations and now is ready to return to growth and profitability, Ullman said on a conference call with analysts to discuss the results.

“The most challenging parts of the turnaround are behind us,” Ullman said.

Liquidity Concern

Liquidity became a concern after the company wracked up losses and spent heavily on trying to execute Johnson’s transformation of the century-old retailer. After Ullman returned in April, the company raised almost $4 billion in cash through borrowings and a share sale last year.

Despite saying it would have $2 billion in liquidity at the end of last year, Charles Grom, an analyst for Sterne Agee & Leach Inc., wrote in a note to clients on Feb. 19 that the chain may need to raise more capital in a few quarters if the sales recovery doesn’t accelerate.

J.C. Penney’s operations generated $383 million last quarter, down from $645 million a year earlier. That led to free cash flow of $246 million, boosting its cash position 23 percent to $1.51 billion. That coupled with $500 million in borrowing capacity under its credit revolver gave it $2 billion in liquidity at the end of the last fiscal year. It expects to have the same amount by the end of 2014.

Best Performance

Revenue fell 2.6 percent to $3.78 billion, trailing analysts’ $3.86 billion average estimate. Excluding sales during an extra week a year earlier, revenue would have risen 1.6 percent.

Same-store sales, which are a key gauge of a retailer’s growth because new and closed stores are excluded, had the first gain since the quarter ended April 2011. Revenue by that measure, which includes online sales, may increase by as much as 5 percent this quarter. That would be the best performance since the period ended Oct. 28, 2006.

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J.C. Penney surprises investors with better-than-expected quarter

Vernon Bryant/Staff Photographer

In CEO Mike Ullman’s upbeat presentation, analysts learned that J.C. Penney is nowhere near throwing in the towel. In fact, towels have traditionally been among Penney’s strongest sellers.

J.C. Penney CEO Mike Ullman tried to calm concerns about ongoing cash needs while delivering better-than-expected results on Wednesday.

Penney is on a path to recovery, he told analysts after reporting a smaller-than- expected fourth-quarter loss and a profit when one-time benefits are added in.

The upbeat presentation wasn’t exactly what investors expected, and Penney’s stock is trading at historic lows this year. Results were released after the market closed, and shares will probably trade higher Thursday.

Ullman’s positive outlook included telling analysts that the company doesn’t plan to close more stores this year beyond the 33 previously announced. Those stores will close by May.

Other highlights:

The company expects to fund its turnaround this year without borrowing more money and said it will have $2 billion at year-end.

Penney predicts its sales will increase about 5 percent in 2014, including a first-quarter same-store sales increase in the range of 3 percent to 5 percent.

The effects of deep clearances to discontinue brands won’t be a big factor this year because the old merchandise has been sold.

In the 10 months since he arrived, Ullman said, Penney has been through a period of stabilization and rebuilding. Now it’s in what he called the “go-forward phase” to position the business for long-term growth.

Morningstar analyst Paul Swinand said Ullman has calmed its vendors, whose confidence is crucial to any retailer.

“Ullman has done a lot with his leadership and putting a plan in place and carrying it out. When your vendors have confidence in what you’re doing, that gives a retailer a lot of breathing room,” Swinand said.

Penney chief financial officer Ken Hannah said the company sees a “path forward to generating free cash flow.”

Penney has spent $3 billion in the last couple of years, scaring investors who can’t see an end to Penney’s cash burn. But if sales go up and costs continue to be contained, there’s a chance it could become profitable again, Swinand said.

Plenty of analysts are skeptics. Penney was one of the most shorted stocks in the market because investors were betting that it couldn’t dig out of former CEO Ron Johnson’s failed and costly transformation that started in late 2011 and continued into 2013.

Charles Sizemore, chief investment officer at Sizemore Capital in Dallas, said it bodes well for the chain’s survival if Penney can postpone going to the debt markets.

“The stock is cheap, but no one thinks Penney is going to be a leader in the retail industry anytime soon,” Sizemore said. Investors will be buying the stock Thursday and bidding up the price, he said, and some of those will be covering their short positions.

Penney reported a fourth-quarter net loss of $206 million, or 68 cents a share, which was better than analysts expected. In the fourth quarter of 2012, Penney posted a net loss of $552 million, or $2.51 a share.

With a one-time tax benefit and a gain from the sale of assets, Penney reported a fourth-quarter profit of $35 million, or 11 cents a share. Analysts surveyed by Thomson Reuters had forecast Penney would report a loss of 82 cents a share.

Total sales of $3.78 billion compared with $3.88 billion a year earlier. Same-store sales, a more closely watched measure, were up 2 percent, and online sales increased 26.3 percent to $381 million.

Penney said its gross margin, or rate of profitability, will improve. The fourth-quarter gross margin was 28.4 percent, compared with 23.8 percent a year earlier. Historically, Penney’s gross margin has been around 38 percent.

The most recent profit margin includes the effect of selling clearance merchandise of brands that are being discontinued, Penney said.

Brands going away include JCP Men’s, Stafford Prep, JOE by Joseph Abboud, William Rast, Joe Fresh Kids and JCP Everyday. It’s also downsizing other brands, including Joe Fresh in women’s apparel, Michael Graves Design, Conran and several in the home department.

Home, men’s apparel, women’s accessories and Sephora shops inside Penney were the company’s top-performing merchandise divisions in the fourth quarter.

Separately Wednesday, Penney said in an SEC filing that it received a termination letter from the Security and Exchange Commission’s Fort Worth office saying that it had concluded its investigation and was not recommending SEC action.

That investigation had to do with Penney’s comments and actions about its liquidity, cash position, and debt and equity financing, as well as the company’s underwritten public offering of common stock announced Sept. 26.

Follow Maria Halkias on Twitter at @MariaHalkias.

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JPMorgan Chase cutting 8,000 jobs

NEW YORK — JPMorgan Chase plans to eliminate 8,000 jobs this year as its mortgage business shrinks and the giant bank aims to control costs at its branches.

About half of those job cuts had already been announced. JPMorgan Chase now plans to cut more jobs — about 3 percent of its workforce of 251,000 — as it tries to reduce $2 billion in consumer banking expenses by the end of 2016. But the bank said it would add about 3,000 jobs in other areas this year.

The cuts revealed Tuesday are in its mortgage and retail banking businesses. The bank cut 16,500 jobs last year in those areas.

JPMorgan’s mortgage business, like that of other big banks, is declining as fewer Americans refinance their home loans.

In November the company agreed to pay $13 billion to settle a civil inquiry into its sales of low-quality mortgage-backed securities that collapsed in value. It also announced a $4.5 billion settlement with 21 institutional investors over mortgage-backed securities issued by it and Bear Stearns between 2005 and 2008. JPMorgan acquired Bear Stearns in 2008.

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