Tuesday, September 24, 2019

JC Penney: What Now?

For the better part of the past decade, JC Penney has been on a downward trend, experiencing a continuous erosion of market share to the likes of Target, Walmart, and Amazon, among others. It has gone through four chief executives, most notably Ron Johnson, who came over from Apple after transforming Apple retail outlets from boring computer stores to electronic gadget playgrounds. Unfortunately Johnson couldn’t successfully reboot Penney’s, and he proceeded to run the ship into the ground…well not quite, thanks to a returning Mike Ullman in 2013, who had held the position from 2004 until the hiring of Johnson in 2011.

Ullman’s stay was only temporary; he stabilized the company and then in 2015 another replacement was found in Marvin Ellison, a well-regarded Home Depot executive. With home improvement in his blood, he proceeded to introduce major appliances into the Penney mix - but he didn’t stick around long enough to find out if it was the right decision. He made a quick exit to Lowe’s in 2018. Perhaps he saw the writing on the wall, although he likely wanted everyone to believe he was heading back to his roots. So the search was on again, and in October 2018 the company hired a new CEO, Jill Soltau, for what could be a one last attempt to right the JC Penney ship.

After nearly a year of revamping the C-wing, Soltau now seems to have a team in place in which she has confidence. But in a pretty poor environment for department stores in general, she certainly has her work cut out for her. Penney has reduced inventory levels by 12.5% this past quarter, which has improved margins and led to lower permanent markdowns. Major appliances and in-store furniture categories have been removed from the merchandise mix, and an ongoing effort to strengthen the omnichannel strategy in order promote growth in e-commerce is also part of her plan.

The company has conducted extensive consumer research to reconnect with the customer, identify major issues facing the company, and rebuild a brand that can generate traffic growth, transform the customer experience, and improve customer retention. In-store there have been improvements to fitting rooms and upgrades to displays, particularly in women’s categories such as jewelry, handbags, shoes, and Sephora beauty. Stores have even added stylists to provide customers with personalized one-on-one service. To be quite honest, however, none of this seems like cutting-edge innovation.

Apparently stockholders don’t think so either. JCPenney’s stock price is down about 13% year-to-date, while the S&P is up about 20%. Currently, Penney’s stock price is below $1.00 a share and is at risk of being delisted from the New York Stock Exchange. Just last week Fitch downgraded JCPenney’s credit rating based on, as analysts said in an emailed report, “continued market share losses and declining EBITDA, with lack of visibility for a material turnaround although there are no near-term liquidity concerns.”

A headline from Footwear News this month read JCPenney Reportedly Headed Toward Debt Talks as Holiday Shopping Season Looms. The article went on to say that “the move would give lienholders and unsecured bondholders access to confidential company information as they continue to urge JCPenney to consider a swap or extension on its debt — valued at roughly $4 billion, according to filings with the U.S. Securities and Exchange Commission. It also buys the department store chain more time to get its business in order ahead of the crucial holiday shopping season.”

So what now for Penney’s? Many questions regarding the company’s fate remain unanswered. It seems that Q4 will be a critical period for Soltau’s efforts to take full effect and make believers out of investors again. But considering the vulnerability of department stores as a category, and the struggle of regional malls just to survive, Soltau’s future at JCPenney may not be any brighter than her recent predecessors.

Bob Sheehan, Vice President of Research

Photo courtesy of JC Penney


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Team News: Mary Russo has been promoted to an Assistant Property Manager at the Burlington, MA office.


The Commerce Department reported that retail sales increased 0.4% last month, down from a strong 0.8% in July. Spending at automobile and parts dealers climbed 1.8% from the previous month, the most since March, after increasing 0.1% in July. Home and garden centers reported a 1.4% gain. Sales at restaurants and bars fell 1.2%, the steepest drop in nearly a year. General merchandise stores reported a 0.3% drop. Online sales continued to soar, rising 1.6%. See sales reports below...Stage Stores Inc. plans to convert its stores to off-price, starting in February of 2020, and expects to be operating approximately 700 Gordmans off-price stores by the third quarter of fiscal 2020. The company plans to close approximately 40 stores; a limited number may continue to operate under the existing department store nameplates until closure. As of this month, Stage Store operates 625 Bealls, Goody’s, Palais Royal, Peebles, and Stage specialty department stores and 158 Gordmans off-price stores in 42 states.


BJ’s Wholesale Club will open two new stores, including BJ’s Gas, in early 2020, in FL and MI. BJ’s Club currently operates 217 clubs and 141 BJ’s Gas locations in 16 states, primarily on the East Coast…Krispy Kreme opened a new prototype store in North Carolina, Krispy Kreme’s most comprehensive redesign in more than a decade. 45 new locations with the updated design will open by the end of 2020…Target Corp. opened its 100th small-format store, and also surpassed its 500th store remodel. Target is on track to remodel 1,000 stores by the end of 2020. After opening 30 small-format locations in 2019, Target said it plans to open nearly 30 more each year for the foreseeable future... Liberty Tax, Inc. parent company of Liberty Tax Service and Buddy’s Home Furnishings, has entered into a definitive purchase agreement whereby Liberty Tax will acquire Sears Hometown’s Outlet business as well as its Buddy’s Home Furnishings Stores in an all cash transaction valued at up to approximately $132.9 million…Five Below is on plan to open 150 stores in fiscal 2019. The retailer opened 44 new stores and ended the quarter with 833 stores in 36 states...Burlington Stores will have remodeled over 60% of its store fleet by the end of this year. The chain, which currently has 691units, has a long-term plan to reach US 1,000 stores...Lego will open more than 160 new stores this year, an increase of almost 40%...Tropical Smoothie CafĂ© opened its 800th location this month….Puma opened its first-ever North American flagship, a two-level 18,000 s/f store in New York City…Ulta Beauty plans to open approximately 80 new stores, execute approximately 20 remodel or relocation projects and complete approximately 270 store refreshes by the end of fiscal 2019... The largest Starbucks Reserve Roastery yet will open in Chicago Nov. 15, in a 43,000 s/f space formerly occupied by Crate and Barrel...Tractor Supply Company opened its 1,800th store this month, in Sunbury, Ohio. Tractor Supply has stores in 49 states. The company opened 80 new stores in 2018 and plans 80 new store openings in 2019...Self Esteem Brands, parent company of Anytime Fitness, has purchased The Bar Method, a low-impact fitness franchise with 123 studios across 30 states and Canada. Self Esteem Brands’ portfolio of franchises also includes Basecamp Fitness and Waxing the City... Old Navy plans to open 800 new stores. Parent company Gap announced earlier this year that it would spin off the lower-priced brand. Old Navy had 1,140 stores at the end of its fiscal year in February and plans to open around 75 stores a year, focusing away from malls, with a goal of 2,000 stores in North America. Gap will also begin franchising its Athleta and Janie & Jack brands internationally, starting with online and in shop-in-shop formats and will eventually open brick-and-mortar stores with proven partners. In the last three years, Gap Inc. has opened 100 franchise locations. Currently, there are more than 500 franchise-operated Gap, Banana Republic and Old Navy stores around the world...Neighborhood Goods will open its 3rd location, a 10,000 s/f store in a new mixed-use development in Austin, TX, in 2020...Under Armour plans to have 2,500 stores by 2023. By the end of  last year, it operated around 1,100 locations...Stop & Shop plans to invest $133 million in store remodels in 21 of its Suffolk County, Long Island locations. This series of remodels is part of a multi-year initiative to refresh the brand’s 400+ stores across the Northeast...At Home is opening four new stores this month, growing its national footprint to 209 locations across 39 states by the end of September...Digital hair color brand Madison Reed plans to open some 600 brick-and-mortar stores during the next four years, which includes 500 franchised locations and 100 company-owned locations...Hollister will open a location at 130 W 34th St., in NYC, one of 40 new stores the company will open in fiscal 2019... Apple has reopened its flagship on 5th Avenue in NYC after a long renovation. At 32,000 s/f the store is nearly double the size of the original.


Flywheel Sports, the spin chain, is closing 11 of its 42 locations. Flywheel had been taken over by a lender amid financial struggles and was working with an advisor to explore a possible sale... Regis Corp. plans to sell more than 3,100 salons in its transition to a full franchise business model. In its last fiscal year, the Edina-based company has sold 767 salons to franchisees, making more than half its 7,145 salons franchises, and said it will sell almost all of the rest of the corporate-owned stores. Regis will also cut the total number of salon brands from more than 50 to just five core brands: Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters and Roosters... Nearly 100 additional Kmart and Sears stores could close in December or sooner. The news comes just weeks after retailers announced 26 Sears and Kmart locations would close in October. Liquidation sales are expected to start in mid-September. About 400 stores are expected to stay open under a new entity Transform Holdco... At least 9 Ruby Tuesday restaurants have closed this month. Most are located along the East Coast from Massachusetts to Delaware. 5 are in New York. The chain has closed more than 120 domestic locations since 2016, about 76 of them in the past 20 months. The chain’s current count stands at 460 units...Fred’s has filed for bankruptcy. The company has begun liquidation sales at its stores, which are expected to close in the next 60 days.. This year, the company’s store footprint shrunk from roughly 500 to less than 100 since April when it began its first round of closures.


Designer footwear retailer The Tannery appears to have closed its final Boylston St. location. The Tannery once operated three locations across Boston and Cambridge...Well-known Nantucket restaurant The Nautilus will open a larger, 2nd location in the Boston Seaport in spring 2020, called the Nautilus Pier 4... Harvard Square’s Out of Town News newsstand, a fixture for over 60 years, will close by October 31 to make way for a new visitor information booth... Floor & Decor will make its New Hampshire debut in the former Bob’s and Staples stores on Amherst Street, Nashua. The new store will combine the Bob’s and Staples spaces and some additional square footage...A 70,000 s/f Market Basket Supermarket will anchor the 306,000 s/f Maynard Crossing mixed-use development currently under construction in Maynard, MA.


GameStop, which has more than 5,700 stores worldwide, is on track to close from 180 to 200 under-performing stores globally by the end of the year. More store closures are planned for the coming 12-24 months...Hudson’s Bay Co. is selling its Lord and Taylor banner to clothing rental subscription service Le Tote for $99.5 million in cash and a secured promissory note for $33.4 million payable in cash after two years. HBC will also receive a 25-per cent equity stake in Le Tote, two seats on the company’s board of directors and certain rights as a minority shareholder...7-Eleven opened a location inside the Westfield Brandon mall in Brandon, FL, the first of 7 locations it plans to open in malls this year. 7-Eleven operates, franchises, or licenses more than 69,000 stores in 17 countries.


Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 


The Commerce Department said retail sales increased 0.4% last month, down from a strong 0.8% in July.

Source: U.S. Department of Commerce - commerce.gov


Treasury Yield Sources:  federalreserve.gov; ustreas.gov


The Conference Board Consumer Confidence Index® declined marginally in August, following July’s rebound. The Index now stands at 135.1 (1985=100), down from 135.8 in July.

Source: The Conference Board - www.conference-board.org


Manufacturing contracted in August, as the PMI® registered 49.1 percent, a decrease of 2.1 percentage points from the July reading of 51.2 percent. This is the lowest reading since January 2016, when the index registered 48 percent. The PMI® contracted for the first time since August 2016 (when it registered 49.6 percent) and ended a 35-month expansion period in which the composite index averaged 56.5 percent. The August contraction ended four straight months of expansion softening.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws