J.C. Penney Co. shares tumbled the most in more than three decades, hurt by deeper losses and a sense among investors that department stores are stuck in an intractable slide.
The rout followed a warning by the company that a massive inventory liquidation would bring a flood of red ink in the third quarter, reinforcing the notion that department stores are losing ground to e-commerce. The shares fell as much as 25 percent in the wake of the forecast.
The move spotlighted key problems for the department-store field: hard-to-sell inventory and a reliance on deep discounts to move stock. J.C. Penney also has been shuttering poor-performing stores in a bid to better match supply with demand.
“We took the necessary steps to accelerate inventory liquidation primarily across all apparel divisions, which increases available funding to invest in new and trending merchandise categories,” Chief Executive Officer Marvin Ellison said. He pledged a “sharper and more disciplined focus on inventory management.”
J.C. Penney now expects to report a loss of 40 cents to 45 cents a share in the third quarter, when excluding some items. That’s deeper than analysts’ estimate of an 18 cent-per-share loss. The company will release results on Nov. 10.
J.C. Penney’s problems are a warning sign of challenges facing all department stores, Omar Saad, an analyst at Evercore ISI, said in a note to clients Friday. Not only is digital media diverting shoppers from stores to shopping online, it’s also changing trends at a pace that makes it difficult for large, traditional retailers to keep up.
“We are strong believers that social media is quickly displacing other mediums as the consumer’s channel of choice for product/trend discovery, and it appears that this shift is happening quickly,” Saad said.
The retailer said on Friday that it’s embarking on a “comprehensive reset” of its apparel inventory by liquidating less popular items. While the effort will lead to a comparable-store sales gain, it was a costly endeavor, resulting in a loss last quarter.
Department stores also face problems beyond rapidly shifting fashion trends. The whole industry faces “intense” headwinds from dwindling mall traffic, Jefferies LLC analyst Randal Konik said in a note. “The shift to e-commerce should also continue to weigh on profitability.”
The shares tumbled to a low of $2.76, marking the worst intraday decline since at least 1980. The stock had already lost 56 percent of its value in 2017 and 95 percent over the past 10 years.
J.C. Penney’s bonds fell the most in almost three years on the news. Its 5.65 percent notes due in 2020 fell 6.3 cents on the dollar and were quoted at 90.8 cents at 12:12 p.m. in New York, according to Trace, the bond-price reporting system.
The forecast also dragged down shares of the company’s department-store peers. Macy’s fell as much as 6.7 percent and Kohl’s slipped as much as 5.6 percent, the biggest intraday declines for both in more than two months. Shares of Nordstrom Inc., the largest high-end department store chain in the U.S., declined as much as 3.8 percent.
Department stores have been particularly hard hit by a shift in consumer preferences, with shoppers eschewing malls for e-commerce and favoring non-traditional, upstart brands. J.C. Penney and its competitors have laid off workers and are reducing store counts while beefing up online operations to adapt to the new landscape.
J.C. Penney expects to see a bump of 0.6 percent to 0.8 percent in same-store sales in the third quarter, in part due to the clearance of inventory. Analysts have forecast an increase of 0.4 percent.
The forecast follows a disappointing second quarter, hurt by clearance sales that were the result of liquidating inventory in 127 closing stores. The company previously announced plans to shutter 140 locations.
To offset these sales, J.C. Penney has been trying to focus on other categories, adding appliances and toys and expanding its partnership with Sephora. The retailer is also pushing services like salons, that require customers to come into stores, in the hopes of encouraging them to buy other products.
The Plano, Texas-based company also is making changes to give a team overseen by Chief Financial Officer Jeffrey Davis more leeway on pricing and planning. Davis assumed the post in July.
The inventory overhaul led to improved performance in the quarter, particularly for women’s apparel, the company said. It also cited appliance sales and omnichannel — a move to meld online and offline channels — as performing well.
“Although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the company,” Ellison said.
— With assistance by Molly Smith
JC Penney Suffers Worst Drop in Decades on Loss Forecast – Bloomberg