If you happened to step foot in a J C Penney Company Inc (JCP) location during the latter half of last month and received poor customer service, there’s a perfectly good explanation — its stores were understaffed, and the few employees working were likely stretched thin.
That’s because JCPenney’s management, presumably after seeing slow sales during the quarter, cut sales staffing to the bone in a last-ditch effort to make sure the retailer reached its quarterly profit targets. Use of corporate credit cards and merchandise markdowns were also stymied.
In a superficial sense, a company has to do what a company has to do. If the sales just aren’t rolling in the way they should be, expenses should be adjusted.
On the other hand, owners of JCP stock should be concerned that the company let itself get into such a vulnerable situation in the first place.
JCPenney Closes Its Wallet
It doesn’t appear as if an internal JCPenney memo was meant to make its way into the hands of the public, but the New York Post was able to get its hands on it all the same. It read:
“We have an expense challenge for the month of April and are asking all stores to do their fair share by closely monitoring all expenses.”
Full-time as well as part-time employees saw their hours cut. Employees working an average of 25 hours per week worked as few as 10 hours per week during the two-week stretch.
The cost-cutting measures ultimately translated into the slashing of 800 work-hours per store, on average, over the two-week span in the latter half of April. The payroll-cut measure is believed to have saved $8,000 per store. With 1,060 stores in operation as of the latest count, the reduction in sales staff hours generated savings of approximately $8.5 million.
For perspective, JCP was expected to report sales of $2.93 billion for the quarter ending in April when it posts those numbers on May 13. Analysts were also expecting the organization to post a loss of $110.2 million for the quarter.
That sales outlook is 2.7% better than the year-ago total, though in light of the drastic expense-reduction efforts, odds are good JCPenney will come up short on the sales front.
While the projected loss could be discouraging, it’s neither unusual nor surprising. Many retailers lose money early in the year, more than making up for it in the fourth quarter. And, inasmuch as JCPenney is in the midst of a turnaround effort, a loss of $110 million would actually be encouraging progress relative to the $175 million it lost in the same quarter a year earlier.
Still …
What’s Really Wrong With J C Penney
Again, cutting expenses that aren’t justified by revenue just seems like good business management. On the other hand, for a company that was apparently on pace to lose more than the projected $110 million, trying to add a mere $8.5 million back to the bottom line — and risk alienating customers as well as employees in the process — is misguided.
The reality is, JCPenney has far bigger obstacles to tackle, most of which are completely out of hourly store employees’ hands.
Turnover, or lack thereof, is one of them.
In retailing, turnover refers to how quickly merchandise is passed through to the customer. Faster is better, as it lets a merchant generate greater sales volume at a given amount of floor space. Over the past 12 months, Penney’s merchandise turnover has been a mere 2.66 … just a little more than half the average retailing inventory turnover rate of 4.67.
The weak inventory measure indicates poor use of the company’s square footage; stalled inventory is also tied-up money.
Another red flag: JCPenney is spending far too much on selling, general, and administrative expenses.
Over the course of the past 12 months, a little more than 31% of the company’s revenue has been spent on SG&A expenses. Most retailers are spending something closer to 25% of revenue on selling and administration costs. Were JCP able to cull its SG&A costs down to that area, it could save something on the order of $800 million per year … more than enough to get the company back in the black.
One could argue that’s exactly what the company did in April, carving out sales staff payroll costs, but those aren’t the cuts that need to made for the long run.
The bulk of the selling and administration costs that can actually be carved out without crimping the stores’ ability to operate are at the corporate-office level — and they don’t just include payroll expenses.
Bottom Line for JCP Stock
Giving credit where it’s due, JCPenney has staged an impressive turnaround thus far. The framework for success is now in place. Going forward, though, much of the company’s success will hinge on getting the aforementioned metrics to palatable levels.
That’s not going to come from store employees. The company’s buyers, advertising personnel and management now have to do their part. And yes, that may mean some of them need to go.
As for the reports of April’s store workers’ hours being cut, the most alarming aspect of the maneuver isn’t that last quarter’s sales may be tepid, but that JCPenney is attacking the symptom rather than the problem. Salespeople can only justify their paycheck if they have the right merchandise to sell, and if they have people in the store to sell to. Store workers are paying the price now because someone else didn’t do their job well weeks ago.
In the meantime, for a mere $8.5 million in savings, the company may have done itself more publicity harm than fiscal good.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
