Penney shares soar on upbeat outlook for 2012
Friday, January 27, 2012
NEW YORK (AP) — J.C. Penney Co. shares soared nearly 19 percent Thursday after the department store chain delivered a 2012 profit outlook that was well above analysts’ projections.
The guidance signaled that the chain’s profit won’t be hurt as Penney embarks on an ambitious transformation plan over the next four years.
The company expects adjusted earnings per share to be at least $2.16 for the fiscal year, above analysts’ $1.60-per-share estimate, according to FactSet.
Penney’s new CEO Ron Johnson, who was the mastermind behind the successful Apple Inc. stores, laid out an aggressive plan Wednesday to reinvent the business. That includes a new pricing strategy that ends rampant discounting and focuses on every day lower prices. It also entails carving out its stores into 100 mini-shops among other plans.
“We are fundamentally re-imagining every aspect of our business, and we fully expect the bold and strategic changes we are making to our operations will result in improved profitability,” said Johnson.
Mike Kramer, chief operating officer, told investors on Thursday that it plans to spend $800 million this year to install the first wave of the shops and improve technology, using cash from its operations. The company plans to open 10 shops at each of its 1,100 stores this year.
The company is targeting $900 million in expense cuts to be completed over the first two years of its transformation, intending to lower selling, general and administrative expenses below 30 percent of annual sales in two years and to 27 percent of sales by the end of 2015.
In 2011, those expenses accounted for 33 percent of annual sales, a higher percentage than rivals including Kohl’s Corp. and Macy’s Inc.
Penney will cut costs from stores and advertising, and at operations at the company’s home office, Kramer said. The company aims to reduce the layers of management there, but didn’t discuss any job cuts.
With its new pricing strategy, Penney will be getting rid of hundreds of sales it held last year and instead focusing on “every day” prices, with along with special “month-long” values and clearance. That will reduce labor costs at the stores since associates won’t have to use their time ticketing products and putting up big sales signs each night. It will also reduce advertising expenses. The company plans to spend $80 million on advertising each month, or $960 million this year. That’s down from last year’s $1.2 billion.
Penney will launch the mini-shops beginning in August. Its new pricing strategy will start Feb. 1.
Johnson said Thursday that Penney will get its first “true read” of customers’ reaction to the pricing strategy on Feb. 1. He said he doesn’t know what the initial reaction will be, but he’s confident that “it will get better and better.”
Penney also announced it will no longer provide quarterly revenue or earnings guidance and, like other major retailers including Wal-Mart Stores Inc., it will no longer report revenue on a monthly basis. The revenue figures are based on revenue at stores opened at least a year, a key retail metric.
Executives spelled out the Plano, Texas company’s changes at a two-day investor meeting in New York.
Shares jumped $6.44 to close at $40.72 Thursday. They had been up 2 percent in January.
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