J.C. Penney CEO salvages earnings disaster

Ron Johnson (Brian Kersey/Getty Images, file)

(AP) NEW YORK - J.C. Penney Co. (JCP) CEO Ron Johnson hasn't run out of magic yet, as far as Wall Street is concerned.

The former Apple (AAPL) executive's soothing words drove the retailer's stock higher even after the company offered up grisly details Friday of a terrible second quarter.

The midpriced department store chain reported a bigger-than-expected loss and plummeting sales. Shoppers are still not buying into a bold new pricing strategy. Penney even withdrew its full-year profit guidance.

J.C. Penney revives "clearance" sales
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After the report, Moody's Investors Services downgraded Penney's rating deeper into junk-bond terrain.

The bleak performance marked the second-straight quarter of severe sales declines since Penney got rid of most steep, temporary discounts in favor of everyday lower prices. The report confirmed it's going to be a hard sell to shoppers who are used to big sale signs and coupons.

Yet, after appearing queasy in premarket trading, investors pushed up Penney's stock price by as much as 9 percent following some reassuring words from Johnson during a 90-minute conference call.

The shares ended up 6 percent, or $1.30, at $23.40 on Friday. The gains show Wall Street still wants to believe the mastermind behind the success of Apple's retail stores and Target's cheap-chic strategy has the magic to deliver.

"The more he sells the hope, the more investors are buying into it," Brian Sozzi, chief equities analyst for research firm NBG Productions, who is still staying on the sidelines as far as Penney's stock is concerned.

Johnson, dressed in a navy blue blazer, white shirt and blue jeans, remained confident and calm as he vowed he was sticking to the plan. He shared more details of his vision for creating a new breed of specialty department stores and said that the latest fixes to simplify the pricing plan are resonating with customers. He and CFO Ken Hannah also allayed concerns about how much cash the company has.

While admitting to mistakes in pricing and marketing, Johnson told investors, "I am completely convinced that our transformation is on track."

Under Johnson's stewardship, Penney is changing everything from the items it stocks to store design. But the riskiest move has been its pricing. The goal is to offer consumers more predictability so they will visit more often. That will help break the vicious cycle of discounting that has soiled the brand, a laggard behind Macy's Inc. and other competitors.

Penney's stock is beaten up - still down by nearly half since their peak above $42 in the afterglow of Johnson's hiring. And business can't get any worse, said Ron Friedman, head of the retail and consumer products group at accounting firm Marcum LLP.

"People are optimistic. They really believe in him," Friedman said. That goodwill means Johnson has at least another year to deliver, he said.

Johnson has said he's used to naysayers. Back in January, Johnson told investors how he faced lots of critics on Wall Street in 2001 when he launched the first Apple store. "There wasn't one positive believer that thought an Apple retail store would work." Of course, they were wrong.

Johnson's task at Penney is more challenging.

In May, Penney's stock plunged 20 percent, its biggest one-day decline in four decades, after the retailer posted a larger-than expected first-quarter loss and a 20.1 percent drop in revenue because of the poor reception from shoppers. Customer traffic was down 10 percent.

Things got even worse in the second quarter as Penney backpedaled a bit on discounts, withdrew TV advertising and canceled some print ad campaigns in mid-June as it figured out its new game plan.

The company lost $147 million, or 67 cents per share, in the quarter ended July 28. That compares with net income of $14 million, or 7 cents per share, a year ago.

Revenue tumbled almost 23 percent to $3.02 billion. Revenue at stores open at least a year fell 21.7 percent, worse than the 18.9 percent drop the quarter before. Customer counts fell 12 percent.

Excluding one-time items, Penney's loss was 37 cents per share. Analysts had expected a 26-cent loss on revenue of $3.2 billion.

Penney on Feb. 1 began using a three-tier pricing with consistently lower daily prices that were 40 percent below last year, deeper monthlong sales on specific items and periodic discounts that are even more generous throughout the year.

But on Aug. 1, Penney eliminated the monthly sales events and increased the frequency of the periodic sales to every Friday. These had been called "Best Price" sales but are now being called "clearance."

Penney is tweaking its advertising to better explain the change. TV ads tout free children's haircuts at stores to draw shoppers.

But Penney is sticking to its "Every Day" low price guns. Items sold under that pricing represent 70 percent of sales since the company began the new strategy.

Investors also seemed to embrace Johnson's more detailed vision laid out Friday for rejuvenating the Penney store experience.

Johnson told analysts he's creating a new kind of store - the specialty department store, which will be carved up with different branded shops to replace the typical sea of clothing racks.

It will also have an area in the middle of the store that will be meeting places for shoppers. At these so-called "Town Squares," which will offer different attractions every two months, shoppers would be able to create greeting cards or take yoga or Pilates classes. Johnson wants to transform the aisles into lively paths leading to the shops. They will feature lots of mannequins, comfortable seating, coffee and juice bars as well as tables built with iPads.

The changes extend to the merchandise, which has been seen as tired and lackluster. Starting this fall, almost half the merchandise will change, with brands either new or redesigned. This fall, shoppers will see such names as Betsey Johnson and Vivienne Tam, who are creating affordable versions for the store.

Penney just launched shops for Levi's and its own jeans brand, Arizona. Johnson said the Levi's shop, which has a denim bar, has seen a 25 percent increase in revenue compared with last year. It plans 100 such shops within each of its stores by 2015 that will either focus on one brand or a variety of labels.

Still, Penney said Friday that it no longer expects to meet its earnings guidance for 2012. It had expected a profit of $2.16 per share. But Johnson cautioned that even though he's seeing some early signs of improvement this month, the company is assuming business will be the same as the first half of the year.

Analysts expected the company to earn $1.26 per share for the year.

Johnson also took the time to chastise Wall Street.

"We said this would be a really tough year," he told investors. "Somehow, I don't think that message got through. Your expectation was much higher than ours, but transforming a company is a marathon. It's not a sprint. It takes time."

[makeithappen123]

I have shopped at JC Penney in stores for 50 years, and online since they went on the web. The reason I am not buying anything they are selling is because they are not selling anything I want to buy. I cannot buy a suitable work outfit - their women's suits and career dresses are dreadful now, awful colors, drab, poorly designed. You can't find a decent wrinkle-free blouse, or comfortable dress pants that isn't this nonsense "modern fit" that forces a muffin top on middle age bodies. Their tops look like something you would find at a flea market, not suitable for work at all. Flowery polyester dreck. Their clothes bunch and wrinkle and fall open at all the wrong places... and they don't last through several washes like they used to. The buyers must think everyone is thin and has terrible taste, because that is all I see in the stores - cheap, ugly designs I cannot wear to work! They have racks and racks of kids' and teens' t-shirts with hideous emblems and offensive designs - dreadful stuff I would never buy for the kids in my family. And in this past year they changed their website so it is practically impossible to navigate, images take forever to load, and you cannot tell what items are in stock until the end of a long series of clicks. Dreadful. Hire back your old designers and buyers - these new people have no idea what REAL people need to wear to REAL work in REAL jobs, with REAL bodies and REAL lives.

[American-Eagle]

Ironic, isnt it that JC Penney "Came Out" like an Anti- Chick-Fil-A, and many people stopped supporting them, due to their overwhelming support of Gay Causes. Previously many people patronized them, but stopped after they "Came Out". This gets no coverage in the main stream press. NBC like most Lib outlets only report propaganda to favor their cause. Absolute Mute when covering Anti-Gay backlash. Chick-Fil-A Slammed on the front page. JC Penney slammed,, not a word. The Gay thing sounds good in West LA, SF, Hollywood, or Manhattan. Too bad Penney's is in the suburbs, Fail.

[MegaProcrastination]

It's hard to take your comment seriously when it would appear you're not even sure which news site you're on. I've no idea why people aren't shopping at JC Penney and can only assume. I know I posted why I'm not as did someone else, and neither had to do with JC Penney's views on world issues. They can think whatever they want, liberal or conservative. I know if they'd had a pair of shoes the day I went that weren't made in China under dubious conditions I would have bought them because I need shoes.

[MegaProcrastination]

I'd shop at JC Penney if they carried more stuff that was made in the USA. They have a few things but I doubt they make up even 1% of their stock.

[MegaProcrastination]

@AustinRunner, I shop in a number of stores and it's actually pretty amazing just how many products are still made in the U.S. if a person takes the time to look. Surprisingly WalMart carries the most U.S. made products hands down. They don't have so much in the way of clothing but as far as every day type items and household goods go there is quite a variety.

Floss picks: Oral B's Glide floss picks (unfortunately they don't work for me nearly as well as the Chinese-made Plackers)
Equate dental floss (possibly other brands as well)
Nexcare Bandages (Band-Aids are made in Brazil and cost twice as much so why buy them?)
Scotch tape
Rubbermaid products
Sterilite products
Corning products
Anchor Hocking & Pyrex products
Various other kitchen tools and accessories (bought a large stainless steel strainer the other day since my old one had holes in it)
Batteries
Lennox fans
Hanes Men's socks
No Nonsense Women's socks
The jeans I buy for hubby and son have at least the fabric made in the U.S. It's shipped to Mexico for sewing.

I could go on but one thing that could help our economy is if people check labels on everything they buy. Sometimes I pay considerably more for U.S. made but the only reason I can afford to do that is because I don't buy much in the way of non-essentials so that gives me more to spend.

A few months back I went to JC Penney's in search of a pair of shoes. They didn't carry a brand made in the U.S. but told me they carried a brand made in England. I tried on a pair and they were pretty comfortable but felt rather cheap. The price tag was $90. I took them off and looked on the bottom of the tongue and sure enough, "Made in China". I gave them back to the clerk and said "no thank you, they're made in China" and left.

There are clothing and shoes that are made right here in our country. JC Penney should look to carrying some of those along with their imported low quality stuff. If I could be an entrepreneur I'd open a store that carried nothing but U.S. made goods. If I was rich I'd open an entire chain of them across the country.

Last month when I went to Costco I saw they had racks of clothes that were all made in the U.S. as a special promo. I looked through all of them in hopes of finding something I liked. I know it was just my taste but they were all hideous.