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

J.C. Penney Co., Inc.(NYSE: on Friday that it would shut down between 130 and 140 of its stores over the next few months. The retailer made its statements while broadcasting fiscal fourth-quarter earnings that beat Wall Street’s forecasts, though revenue and same-store sales did not meet expectations. The company’s shares fell roughly 4 percent in early trading amongst uncertainties that the store cessation plan would be enough to strengthen slow sales. Driving that worry was the company’s 2017 outlook, which fell short of its previously announced three-year plan.

How J.C. 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 2016’s fourth quarter, J.C. Penney reported earnings of 39 cents per share on $4 billion in revenue. Along with the stores Penney’s plans to shut down, it will close two distribution centers. The joined closures will aid the retailer invest in its better stores, and raise the overall brand standard of the company. The list of affected stores will be announced next month, once sales associates and other staff have been informed. Most of the closures will happen 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. 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 close consist of 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. Sales in these locations were drastically below the remaining store base and operate at a much higher expense rate.

The retailer predicts to save almost $200 million a year by closing these stores. It will take a pretax charge of approximately $225 million associated with the closures in the first half of fiscal 2017. Penney’s will provide approximately 6,000 employees with a “voluntary early retirement program” for workers of a certain age and tenure. As a result, the company forecasts a net increase in hiring as the number of full-time employees anticipated to accept the package will far exceed the number of full-time positions affected by the store closures. Ellison informed in January that the department store chain was getting ready to downsize. The news came on the heels of store closure announcements by Macy’s and Sears.

“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 accomplished 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. However, revenue still fell short in the holiday quarter. Sales at Penney’s established stores declined 0.7 percent, and heavier promotions weighed on its margins. According to CNBC, 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 determined to recapture the sales profitability it lost during a failed turnaround strategy. For fiscal 2017, J.C. Penney predicts 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 set 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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