J.C. Penney Co. Inc. JCP-N said the planned overhaul of its 1,100 U.S. stores and changes to its pricing strategy will not put a dent in 2012 profit, sending shares of the department store chain sharply higher on Thursday.
Wall Street had been worried that Penney’s planned makeover, announced Wednesday, would hurt the bottom line.
The retailer intends to wean itself from a heavy dependence on discounting and also subdivide each of its stores into about 100 smaller boutiques, while attracting exclusive new lines by designers such as Nanette Lepore.
The physical revamp and changes to the pricing plan are the first moves by new chief executive officer Ron Johnson to transform the department store chain, which in recent years has fallen behind competitors including Kohl’s Corp. KSS-N and Macy’s Inc. M-N
Penney expects to spend $800-million (U.S.) this year on opening the first 10 in-store boutiques and upgrading its information technology. It told Wall Street analysts on Thursday that it could fund the expenses from sales.
The whole project will not be completed until 2015.
Wall Street analysts reacted positively to Mr. Johnson’s plans on Wednesday, but reserved final judgment until hearing how the overhaul would affect profits.
Penney chief operating officer Michael Kramer told analysts and investors on Thursday that the company expects a profit of $1.59 a share or more in the fiscal year ending in January, 2013, on par with its fiscal 2011 profit, and above its expected current-year profit.
“The concern was, ‘How are customers going to receive this new message and what would impact on profitability be?’” Morningstar analyst Peter Wahlstrom said.
Penney thinks it can cut costs by $900-million over the first two years of its transformation. Some of the savings will come from running only 12 pricing and product promotions a year compared with the 590 such events it ran last year, and from not having to constantly change signage to tout price cuts.
“With today’s forecast, management appears confident that combination of cost cuts and simpler pricing strategy can result in improved profitability,” Mr. Wahlstrom said.
Mr. Kramer also laid out plans to reduce costs and said sales, general and administrative expenses would fall to 27 per cent by 2015, from 33 per cent in 2010, in line with current rates at Macy’s and Kohl’s.
Mr. Kramer also said Penney’s reporting structure was bloated and suggested the company could save $90-million a year with a leaner operation at its headquarters in Plano, Tex. The company did not say whether that meant layoffs.
Penney announced plans on Thursday to stop reporting sales on a monthly basis, and do so only on a quarterly basis. The retailer will also reduce the frequency of its profit forecasts from once a quarter to once a year.
Penney CEO Mr. Johnson told the audience on Thursday that he did not want employees to “feel pressure” to meet monthly targets, and instead would like them to focus on long-term goals.
