On paper, it was a really tough quarter for J.C. Penney (JCP), but CEO Ron Johnson was successful in convincing investors that the company is moving in the right direction.
The retailer, which launched an overhauled pricing strategy in February, lost $147 million during the second quarter, nearly three times more than analysts were expecting. Sales were extremely weak, falling 23% overall from a year earlier, and same store sales, a key gauge of a retailers' health, tumbled 22%. The drop in revenue squeezed the company's margins, pushing them down to 33% of sales from 38% a year ago.
Given the rockier-than-expected performance, J.C. Penney withdrew its earnings guidance for the rest of the year.
Still, Johnson was successful at reassuring investors that things will turn around.
"We have now completed the first six months of our transformation and while business continues to be softer than anticipated, we are confident the transformation of J.C. Penney is on track, " said Johnson, who prior to joining J.C. Penney nine months ago worked at Apple (AAPL), where he spearheaded the company's retail store strategy and Genius Bar. "The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course."
Shares of J.C. Penney, which initially fell on the company's weak results, rallied as much as 11% after Johnson spoke on an analyst call Friday. The stock closed the day about 6% higher.
Back in February, J.C. Penney launched its "Fair and Square" pricing plan that introduced three different price levels: everyday low prices, month-long sales on seasonal items and "best prices" or clearance promotions.
But after consumers failed to embrace the three-tiered structure, the company revised it to just two: everyday low prices and clearance.
"After three or four months of trying to communicate our three prices to customers, it was clear that it was confusing," admitted Johnson, who said he made the decision in mid-June to go dark on marketing and rethink the strategy. "We wanted to deliver great value every day that customers could trust and understand, so we had to fix that."
Though it's only been 10 days since J.C. Penney has implemented its simpler pricing structure, Johnson said traffic and sales figures are already showing improvement.
The company also started to unveil its boutiques within a store. Eventually, the entire department store will be carved out into 100 brand shops within one store.
So far, its Levi's shop has lifted sales of the brand by 25%, "performing exactly as we had hoped," Johnson said.
While Johnson didn't provide a specific earnings guidance for the remainder of 2012, he said he expects the company to resume profit growth in 2013. Johnson also boasted that company is on track to finish the year with over $1 billion in cash.
"In January, we laid out our four-year plan and we said this year will be tough," Johnson said. "Somehow I don't think that message go through. A transformation of a company is a marathon, not a sprint. It's going to take time."
Even though sales seem to be "falling down a cliff with no bottom in sight," NBG Productions chief equity analyst and portfolio manager Brian Sozzi said Johnson will likely be given plenty of time to implement his transformation plan.
Earlier this summer, J.C. Penney's largest shareholder, Bill Ackman, voiced his confidence in the company and in Johnson. Ackman's Pershing Square Capital Management owns almost 20% of the Plano, Texas-based retailer.
"He's got the backing of the largest shareholder, so he'll have time to resettle the store and get the marketing and merchandising right," said Sozzi. "If sales turn around, they'll be able to generate nice earnings, but at this point, it's hard to predict what's going to happen.">
While Johnson insists that the company's transformation is "on track," Sozzi counters that J.C. Penney's "financials are way off track." Sozzi has been shorting shares of J.C. Penney since January.
"The financial results for the quarter were worse than even the worst expectations," he said. "This holiday season is shaping up to be a bad one. If the 2013 holiday season is also a really bad one, then you have to question if Johnson will make through 2014."
Still, there's hope that the plan could work.
"I like Johnson. He's a visionary, and I can appreciate what he's trying to do," said Sozzi. "If he pulls this off, we'll have a very different mall experience and J.C. Penney will be light years ahead of Macy's (M) and other competitors."
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