J.C. Penney to close 130-140 stores and offer 6,000 employees early retirement
DALLAS – J.C. Penney announced on Friday its biggest number of stores closings in recent history and indicated the decision will result in it exiting some smaller markets.
Penney said it will close 130 to 140 stores over the next few months. That represents about 13 percent of its 1,014 stores, but Penney said the stores generate less than 5 percent of total annual sales and are unprofitable.
A full list of planned store closings will be released in mid-March after stores have been notified. Most of the stores are expected to close in the second quarter, or by the end of July.
Penney estimated the decision will result in an annual cost savings of $200 million. However, it will result in the company taking later this year a pre-tax charge of about $225 million to cover lease terminations, non-cash asset impairments and transition costs.
Penney also said Friday it is offering a voluntary early retirement program to 6,000 eligible employees across the company, including workers at its suburban Dallas headquarters. It’s also closing two distribution centers in Lakeland, Fla., and Buena Park, Calif.
It’s a deep cut for Penney, which has trimmed a number of stores annually for years but now is making a big move to return to profitability. Penney is still clawing back from its failed attempt to reinvent the department store by former CEO Ron Johnson in 2012 and 2013. Penney’s sales declined by more than $5 billion during that time and those sales haven’t come back. J.C. Penney CEO Marvin Ellison noted during a call with analysts Friday how far the company has come from 2013 “when conventional wisdom was that Penney wouldn’t survive as an ongoing company.”
The timing of the early retirement offer, which is based on age and years with the company, shouldn’t be viewed as some “desperation” move, Ellison said.
“This was done purposefully. It’s not a coincidence or an act of desperation. We just posted our first profit in years,” he said in an interview Friday. “We’ve been all about controlling costs as the home office, but this is more in line with lessening the negative impact from store closings.”
About 5,000 people work at the stores that are closing. By offering retirement to 6,000 people across the company, there will be jobs opening that full-time employees can fill, he said.
Costs and future savings will be based on the number of people who take the offer by the deadline of March 17, Penney said. Even with all its financial problems in recent years, Penney has a well-funded pension plan. It will remain that way after the early retirement offer, Penney said.
“We understand that closing stores will impact the lives of many hard working associates, which is why we have decided to initiate a voluntary early retirement program for approximately 6,000 eligible associates,” Ellison said in a statement. “By coordinating the timing of these two events, we can expect to see a net increase in hiring.”
Penney also reported its first profit since 2010, but it sales didn’t meet expectations.
Ellison said margins were hurt by promotions that weren’t adequately “data driven” but were more about just increasing sales with aggressive coupons. It was a tactical decision to drive traffic but could have been done better, Ellison said.
The company reported a fourth-quarter profit of $192 million, or 61 cents a share, versus a loss of $131 million, or 43 cents a share, a year ago. Total sales declined 0.9 percent to $3.96 billion from $4 billion last year. Same-store sales fell 0.7 percent. Analysts surveyed by Thompson Reuters expect a profit of 61 cents a share and a sales decline of 0.4 percent to $3.98 billion.
This year, including the impact of store closings, Penney said it expects to be profitable and post sales results just below or above 2016. Ellison said the company made a conservative forecast based on the uncertainty on the retail scene.
“When we look at the state of the consumer, by every measure, there are no flags for why the consumer would pull back spending. Unemployment is down and wages are up,” he said. “And we feel good about where we are going and the things we can control.”
Penney plans to open 70 more Sephora shops in its stores this year, and salons have made a strong turnaround in 2016, after being a drag for several years, Ellison said. It’s also adding kitchen and laundry major appliance departments to 100 more stores after introducing the concept last year in 500 stores. Penney is also positioning itself to take advantage of Sears’ ongoing store closings. It shares 400 malls with Sears, Ellison said. It’s also testing other big ticket items with partnerships offering flooring and heating and air conditioning service.
Sephora, salons, fine jewelry, appliances and toys were strong categories in the fourth quarter. Penney has introduced temporary toy departments for the holiday season, but this year is leaving toys in about 100 stores, Ellison said.
Women’s apparel was the laggard in the fourth quarter, Ellison said during the conference call. If women’s had performed the same as men’s and children’s, fourth-quarter sales would have been positive, he told analysts, adding that management changes in women’s have been made.
Women’s apparel general manager Siiri Dougherty has left the company, Penney spokeswoman Daphne Avila confirmed. Women’s is the largest single category for Penney, and Ellison suggested it has for too long been focused on career clothing while the customer has moved more casual.
Last year, Penney also focused on the plus size shopper, and that was one category, along with athletic apparel, that did well in women’s. “We are No. 3 in men’s big and tall and not trying really hard,” Ellison said, adding that Penney should be stronger in plus women and juniors.
To improve margins, Penney chief financial officer Ed Record said, Penney has started regional pricing in 60 stores and so far results are “strong.”
Penney has maintained the same prices across the U.S., and “maybe it doesn’t make sense to have the same prices in Manhattan as in rural Alabama.” Other department stores including Dillard’s use the regional pricing, charging less in smaller markets for some of the same merchandise.
Penney sold its headquarters and land in two transactions for a total of $346 million. Surrounding land netted the company $80 million, Record said.
The second transaction was for the sale and partial leaseback of the home office. Penney received $216 million in cash and a $50 million, 4-year note receivable from the buyer. Penney will use most of the net proceeds received to pay down more debt in 2017, Record said.
While Wall Street has been pushing Penney to close stores for years, investors traded the stock lower on Friday after Penney missed its fourth quarter and full-year sales target.
Ellison said in January at the Weitzman annual real estate breakfast in Dallas that store closings were coming, but he also said he continues to believe that stores are a key part of online shopping.
In an interview Friday, Ellison said Penney needed the last six months of integrating stores with its online business to determine shopping patterns and which stores it makes sense to close.
Buy-online-and-pick-up-in-store transactions and merchandise returns in stores help alleviate shipping costs for retailers. Penney added those capabilities to all its stores last August.
It also wanted to see how new salons were received. “That’s all helped us understand what is the right geographic footprint,” he said. Larger markets may also see store closings.
“Maintaining a large store base gives us a competitive advantage in the evolving retail landscape since our physical stores are a destination for personalized beauty offerings, a broad array of special sizes, affordable private brands and quality home goods and services,” Ellison said Friday.
Ellison said a double-digit sales increase for jcpenney.com and the ability to use stores as delivery points, is helping to offset the high costs of e-commerce. In 2016, he said, “75 percent of online orders touched a physical store.”
Penney’s announcement comes as big and small mall-based retailers have accelerated store closings or gone out of business. Sears’ ongoing closings and Macy’s January announcement that it’s closing 68 stores, and 30 more later, is leading mall owners to sell or redevelop aging properties. That’s causing Penney to leave too.
“I have a deep appreciation and respect for our associates who are on the front lines working tirelessly to serve our customers every day. Closing a store is never an easy decision, especially given the local impact on valued employees and our most loyal shoppers,” said Ellison. “While any actions that reduce or exclude our presence in communities across the country is always difficult, it is essential that J.C. Penney continues to evolve in order to achieve long-term growth and profitability and deliver on shareholder value.”