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Penney sales tumble but back-to-school 'encouraging' so far

Customers ride the escalator at a J.C. Penney store in New York August 14, 2013. REUTERS/Brendan McDermid
Customers ride the escalator at a J.C. Penney store in New York August 14, 2013. REUTERS/Brendan McDermid

By Phil Wahba

(Reuters) - J.C. Penney Co Inc said on Tuesday quarterly sales tumbled again last quarter, even as reinstated CEO Myron Ullman worked to roll back his predecessor's failed merchandising strategies, but there were signs that customers were returning for the back-to-school season.

The company, which reported another steeper-than-expected loss, said sales trends improved every month in the quarter and that business so far this back-to-school period, the second-most important for Penney after the holidays, was "encouraging."

Penney forecast it would have $1.5 billion in cash at the end of the year, enough to have ample merchandise on shelves.

Its shares rose nearly 3 percent to $13.63 in late morning training.

But the lingering impact of Penney's failed efforts to remake itself into a more upscale destination in 2012 under previous CEO Ron Johnson continued to weigh on results and Chief Executive Myron Ullman said the retailer still had a lot of work to do to steady itself.

"It is no secret that the company's prior merchandising and promotional strategies weren't working. We had to make changes, but these changes take time and they have financial implications," Ullman said on a call with analysts.

Sales at stores open at least a year fell 11.9 percent in the quarter, during which it reverted to a promotions-heavy strategy to try to stop the sharp sales decline. Analysts were expecting a 7.4 percent drop, according to Thomson Reuters.

The quarter was the first full period under Ullman, who had been CEO from 2004 to 2011, since he returned in April to fix the damage wrought by Johnson, who left after his efforts led to a 25 percent sales decline last year and a $1 billion loss.

The company's gross margin fell 3.6 percentage points to 29.6 percent of sales after it had to slash prices to clear merchandise shoppers did not want, much of which was brought in by Johnson who wanted to transform Penney into an emporium of dozens of boutiques each showcasing a trendy brand.

The quarter was a tough one generally for retailers, including Penney rivals Macy's Inc and Kohl's Corp , which last week reported disappointing sales in an very discount-heavy retail environment.

UNDOING HOME MAKEOVER

Shoppers have not latched on to many of the new, trendier brands in the home-goods section, Ullman said in a statement. Those have included products by designer Michael Graves,

After spending hundreds of millions of dollars under Johnson to re-launch the home-goods section, which in June the company said was crucial to its turnaround, the Penney will now re-organize items by category rather than by brand and bring in more lower-priced merchandise.

"Ullman is rolling up his sleeves and working to get this ship back on track and bringing in the merchandise Penney shoppers want," said Walter Loeb, an analyst with Loeb Associates.

Home-goods last year accounted for 12 percent of overall sales compared with 21 percent six years earlier. The relaunch was meant to re-invigorate an important business that generates shopper traffic.

The company also said it expected to have $1.5 billion in overall cash liquidity at year's end. Despite the re-organization of the home section, Chief Financial Officer Ken Hannah said capital expenditures would return to the much lower levels of the past.

Penney said it would have enough inventory in stores and online well in advance of the holiday season. Another encouraging sign for Penney was online sales fell 2.2 percent in the quarter, suggesting the decline in that business is bottoming out.

The higher level of markdowns and lower-than-expected sales deepened Penney's net loss in the quarter to $586 million, or $2.66 per share, from $147 million, or 67 cents per share a year earlier. Overall sales fell 11.9 percent to $2.66 billion.

Excluding items such as a loss associated with the tax valuation allowance, Penney lost $1.17 a share, 11 cents worse than expected.

The quarter was also full of boardroom drama: William Ackman, the activist billionaire investor who brought in Johnson and is still Penney's largest shareholder, feuded publicly with Penney's chairman earlier this month before quitting the board a few days later.

He and the company reached an agreement last week on how he can divest his 18 percent stake if he so chooses.

(Reporting by Phil Wahba in New York; Editing by Jeffrey Benkoe and Maureen Bavdek)

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