A shopper makes a purchase at the JC Penney department store in North Riverside, Illinois, the US. Picture: REUTERS
A shopper makes a purchase at the JC Penney department store in North Riverside, Illinois, the US. Picture: REUTERS

Bengaluru/New York — JC Penney reported a smaller-than-expected quarterly loss on Thursday, as the department store operator’s efforts to cut costs and shutter unprofitable businesses paid off, sending shares of its penny stock higher by as much as 14%.

The 117-year-old retailer, one of the worst hit by the surge in online shopping in the past decade, re-affirmed that it expects to have positive free cash flowing during 2019 and would have funds of about $1.5bn available at the end of 2019.

Last month, Reuters exclusively reported that the company had hired advisers to explore debt-restructuring options.

The Texas-based retailer also gave a forecast for 2019, the first full-year outlook it has given because withdrawing its 2018 expectations in November to give new CEO Jill Soltau time to settle in.

Penney’s sales continue to fall, down 9% in the quarter, and it forecast that comparable sales would drop in 2019 between 7% and 8%, worse than current analysts’ expectations, according to Refinitiv data.

But the company’s net loss more than halved, to $48m, compared with the same period a year ago, and Soltau said the company is benefiting from a reduction in excess inventory and a reining in of permanent price markdowns. “While we still have work to do on our topline, I strongly believe that growing sales in an unprofitable way is simply not an option,” she said.

The company also announced on Thursday that it will start selling second-hand women’s clothing and handbags at 30 stores in partnership with fashion resale marketplace thredUP, starting this week.

“We’re excited about the prospect of creating a new in-store experience that makes high-end brands attainable, as well as catering to eco-minded consumers who want more sustainable options in their wardrobe,” Soltau said of the partnership.

Rival Macy’s also announced a partnership with the resale company a day prior, underscoring how department stores are aiming to reach a new and younger customer in ways they previously have not.

Gordon Haskett analyst Chuck Grom said Penney’s improvement in gross profit margin, which rose to 39.5% from 35.3% a year ago, was “the big upside surprise in the quarter — led by lower markdowns, better shrink control, and overall better merchandise margin rates”, adding that “these factors should trump the top-line weakness, which is partly self inflicted”.

Re-focusing on mid-priced apparel

To stem the company’s falling sales, boost margins on merchandise and ultimately reassure investors it can lure shoppers back into its stores amid fierce competition from online giants such as Amazon and discount retailers such TJX Companies’ Marshalls and TJ Maxx chains, Soltau has been striving to reduce inventory at stores and close under-performing outlets.

Earlier this year, Soltau chose to stop selling major appliances and furniture in store, re-focusing on its main business of selling mid-priced apparel to middle-class families.

Fine jewellery, women’s and men’s apparel and footwear outperformed in the second quarter, ended August 3, the company said, while women’s accessories under-performed.

Soltau told investors on a post-earnings call the ongoing trade spat between the US and China has had “minimal impact” on the business thus far, and that Penney has and will continue to diversify its sourcing and reduce its exposure to China.

Excluding items, Penney posted a loss of 18c a share, lower than estimates of 31c. It ended the quarter with liquidity of about $1.70bn.

Shares in the company had fallen 45% this year as of Wednesday’s close. On Thursday, shares were up 4c at $0.61 in morning trade. Last week, the New York Stock Exchange said Penney had six months to get its stock price above $1 or its shares could be de-listed.