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RAPAPORT... Six months into its reinvention strategy, J.C. Penney Company reported that sales fell 23 percent year on year to $3 billion for the second quarter that ended on July 28 and cost of goods sold increased 16 percent to $2 billion. Comparable-store sales plunged 21.7 percent. The retailer reported a loss of $147 million, or 67 cents per share, compared with a profit of $14 million or 7 cents per share one year ago. The net loss includes restructuring costs, severance, inventory transition and markdowns and a gain on the redemption of the Simon (property management company) REIT units. "We have now completed the first six months of our transformation and while business continues to be softer than anticipated, we are confident the transformation of JCPenney is on track. The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course," said JCPenney's chief executive, Ron Johnson. "This month we simplified our pricing, launched the first of our new shops, and accelerated our marketing efforts to focus on brands, products and value. Early response to these efforts has been very encouraging." He added, "We continue to learn and adjust, and fully expect that our unique, specialty department store experience will drive JCPenney's long term success. Our rock solid balance sheet will support the execution of our transformation and position us for growth beginning in 2013." JCPenney exited the outlet business during this transition period, which negatively impacted sales, however, its Internet business through jcp.com was also lower and recorded a 33 percent year on year decline at $220 million. Gross margin fell to 33.2 percent of sales, compared with 38.3 percent one year ago, and it was negatively impacted $102 million worth of markdowns on discontinued inventory in preparation for new product arriving in the fall of 2012. Excluding these transitional markdowns, which lowered gross margin by 340 basis points, adjusted gross margin was 36.6 percent of sales, according to the company. The retailer still expects aggressive management of expenses, layoffs and other operational efficiencies will result in a savings of approximately $900 million at the end of 2012. JCPenney closed the second quarter with approximately $888 million in cash and cash equivalents on its balance sheet, compared with $1.55 billion one year ago. Looking ahead, JCPenney no longer expects to meet earnings targets, however, it expects to end the fiscal year with in excess of $1 billion of cash on the balance sheet after spending $800 million in capital expenditures to support the company's transformation efforts and paying off $230 million of notes due in August 2012.
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