JCPenney shuttering up to 140 stores as sales weaken, more sluggish growth seen ahead

J.C. Penney finally lifted the lid on its plans to downsize its fleet, telling investors on Friday that it would close between 130 and 140 of its stores over the next few months.

The retailer made its comments while reporting fiscal fourth-quarter earnings that topped Wall Street’s expectations, though revenue and same-store sales fell shy of expectations.

The company’s shares bounced between positive and negative territory in premarket trading as investors digested the news and contemplated whether the store closure plan would be enough to reinvigorate sluggish sales.

Here’s how Penney’s did during the quarter:

— EPS: 64 cents a share, adjusted, versus 61 cents expected, according to Thomson Reuters’ consensus
— Revenue: $3.96 billion, versus an expectation of $3.98 billion, according to Reuters
— Same-store sales growth: down 0.7 percent, versus 0.3 percent drop expected, according to FactSet’s consensus

In last year’s fourth quarter, J.C. Penney reported earnings of 39 cents per share on $4 billion in revenue.

“Although JCP ended its fiscal year with a shrink in sales, it can take some comfort from the fact that the decreases are modest and that it managed to outperform its main department store rivals,” said Neil Saunders, managing director of GlobalData Retail, in an email.

Saunders added that the company’s bottom line was also encouraging. “In our view, this alone serves as evidence that Marvin Ellison’s turnaround plan is delivering and that JCP is finally getting its house in order,” he said.

Along with the stores Penney’s plans to close, it will shutter two distribution centers. The combined closures will help the retailer invest in its better stores, and “raise the overall brand standard of the company,” Ellison said.

The list of impacted stores will be released next month, once sales associates and other staff have been notified. Most of the closures will occur in the second quarter.

“We believe closing stores will allow us to adjust our business to effectively compete against the growth threat of online retailers,” Ellison said.

“During the year, it became evident the stores that could fully execute the company’s growth initiatives of beauty, home refresh and special sizes generated significantly higher sales, and a more vibrant in-store shopping environment,” the CEO said.

The locations Penney’s will shutter represent 13 to 14 percent of its store portfolio but generate less than 5 percent of annual sales. They would either require “significant capital” to meet the company’s brand standard or are minimally cash flow positive, the company said. Comparable sales in these locations were “significantly below” the remaining store base and operate at a “much higher” expense rate.

The retailer expects to save roughly $200 million a year by closing these stores. It will take a pretax charge of roughly $225 million related to the closures in the first half of fiscal 2017.

Penney’s will provide roughly 6,000 employees with a “voluntary early retirement program” for workers of a certain age and tenure. As a result, the company expects a net increase in hiring as the number of full-time employees expected to accept the package will “far exceed” the number of full-time positions affected by the store closures.

Ellison warned in January that the department store chain was getting ready to downsize its fleet. The news came on the heels of store closure announcements by Macy’s and Sears.

Yet even as he announced the company’s closures, Ellison reiterated the importance of bricks-and-mortar locations to its long-term strategy.

“Maintaining a large store base gives us a competitive advantage in the evolving retail landscape since our physical stores are a destination,” Ellison said. “It is essential to retain those locations that present the best expression of the J.C. Penney brand.”

For the year, Penney’s achieved its well-publicized goal of reaching $1 billion in EBITDA, marking a $477 million improvement. It was the first time the retailer achieved positive net income since 2010, Ellison said.

Yet revenue fell short in the holiday quarter. Sales at Penney’s established stores declined 0.7 percent, and heavier promotions weighed on its margins. The company had previously announced that comparable sales fell 0.8 percent in November and December.

Under Ellison’s leadership, J.C. Penney has been making strides in its efforts to recover the sales profitability it lost during a failed turnaround strategy. Since taking the helm in August 2015, the soft-spoken executive has taken expenses out of the business and refreshed the stores’ assortment. That includes the company’s return to appliances last year and a push into plus sizes.

For fiscal 2017, J.C. Penney expects comparable sales to fall within a range of negative 1 percent to positive 1 percent, and to earn between 40 cents and 65 cents a share, adjusted. Analysts polled by Thomson Reuters were predicting earnings of 56 cents a share for the fiscal year.

Back in August, Ellison laid out a three-year plan for Penney’s starting in fiscal 2017. He told investors that compounded annual comparable sales would grow 3 percent, and that earnings per share would hit $1.40 to $1.55 by 2019.

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