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Indications Of Weak Sales At J.C. Penney?

 January 14, 2013 10:49 AM

(By Mani) This past weekend the New York Post reported that fourth-quarter comp sales at J.C. Penney Company, Inc. (NYSE: JCP) are tracking down in the high 20's, which indicates sales are still weak at the department store chain.

Moreover, the report would disappoint those investors hoping for signals of a turnaround at the company as the street is expecting a 20 percent drop in the fourth quarter comparable store sales, a key measure to gauge retail performance.

A weak holiday selling season has reflected transitional struggles at J.C. Penney, but the market is hoping that it does not necessarily derail the company's longer term turnaround potential.

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"Our recent store visits suggest that JCP continues to aggressively clear older product that is not core to the company's longer term repositioning," Oppenheimer analyst Brian Nagel said in a note to clients.

The company and its vendor partners remain committed to launching 40 new shop-in-shop concepts ahead of holiday 2013 beginning with Joe Fresh in March.

Aggressive promotions at J.C. Penney that began a few weeks ago persist. Certain older categories now appear fully cleared. A move back to more aggressive price promotions represents a clear deviation from the strict everyday low pricing (EDLP) strategy initially outlined by CEO Ron Johnson

"We are encouraged by the decision of JCP to refocus on price promotions. While a deviation from the strategy initially laid out by CEO Ron Johnson, targeted price promotions seem to be helping JCP reconnect with customers," Nagel wrote.

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Meanwhile, J.C. Penney is likely to build cash in the fourth quarter in excess of $800 million before it again starts to burn cash to fund capex spending for new fiscal 2013 store within the store concepts, and could tap the revolving credit line to fund working capital needs.

J.C. Penney operates about 1,100 department stores in 49 states and Puerto Rico selling apparel, footwear, home furnishings, accessories, fashion and fine jewelry, and beauty products. The company is undergoing one of the most significant transformations in the history of retail under CEO Ron Johnson, who joined in late 2011.

In its zeal to execute the new Shop-in-Shop strategy successfully, it has ignored the performance of the company's legacy departments and in the process impaired its "turnaround cash engine."

The chain is abandoning its increasing reliance on aggressive short-term price promotions and reconfiguring its stores to better assort a wider selection of higher quality and often unique branded items.

However, the turnaround at J.C. Penney, one of the largest department store chains, has thus far proven more challenging than almost anyone imagined, and the reported comp sales drop may weigh on shares in the near-term.

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