NEW YORK J.C. Penney Co Inc's early effort to remake itself as an affordable fashion-oriented retail chain and wean consumers off discount coupons took a much bigger-than-expected toll on sales in the first quarter.
The department store owner also surprised investors by ending its dividend to help fund a multi-year overhaul under new Chief Executive Ron Johnson, who was credited with helping to build Apple Inc's much-envied retail stores. Penney's shares fell 12.7 percent to $29.10 in late trade on Tuesday.
Sales at J.C. Penney stores open at least a year fell 18.9 percent during the quarter, far worse than the average Wall Street estimate for a 12.2 percent decline.
In February, the retailer began to eliminate hundreds of sales events in favor of "everyday low" prices on most items, a radical departure that analysts predicted would confuse or alienate its customers.
"Coupons were a drug, they really drove traffic," Johnson said at the company's quarterly analyst conference in New York.
Penney reported a net loss of $163 million, or 75 cents per share, for the quarter ended April 28, compared with a profit of $64 million, or 28 cents per share, a year ago.
"It's one big year we have to get through ... We are trying to essentially convert the Titanic into 1,100 wave runners, and that is really hard to do," Johnson said.
Johnson, who became CEO last November, said Penney was ramping up advertising aimed at better explaining its new pricing.
Despite the sales debacle in a quarter Johnson called "tougher than expected," Penney sounded an optimistic note, announcing a slew of new brands it will sell that it said would draw in shoppers looking for fashion rather than discounts.
In August, Penney will start remodeling stores into what eventually will become homes for 100 separate shops. It announced additions to its line-up, including brands like Jonathan Adler and Michael Graves, on top of a previously announced deal with home goods icon Martha Stewart.
Penney will also launch its own private label "JCP" brand of clothing, sell a line of Tourneau watches and increase its offerings of sportswear by Nike Inc.
LESS SHOPPER TRAFFIC
Visits to Penney stores fell 10 percent in the quarter, with the biggest declines on weekends. But Johnson said he was encouraged that sales of fashion products held up well, with basics like underwear and towels languishing most.
While Wall Street was braced for sales to slump when the discounts were taken away, the dividend move came as a shock. Penney repeated its assertion that it could self-fund the transformation through its retail business.
The Plano, Texas-based company said it was ending its 20-cent-per-share quarterly dividend and that it would use the resulting $175 million in savings to help fund the company's turnaround.
"It also makes you wonder, do they have the balance sheet to fund this massive transformation of the business over the next two to three years?" said Brian Sozzi, chief equities analyst for NBG Productions.
But Penney, which during the quarter eliminated hundreds of jobs at its headquarters and in stores, said that it would be able to cut more that the previously forecast $900 million in costs this year.
Total sales slumped 20.1 percent to $3.15 billion, below the $3.41 billion Wall Street was expecting, according to Thomson Reuters I/B/E/S.
Earlier on Tuesday, home improvement chain Home Depot Inc posted a quarterly sales increase that fell short of Wall Street's expectations.
The retailer said it expects to book more restructuring charges during the year. It also warned that more inventory write-downs may be in the cards as it abandons certain lines of business.
As a result, it said it no longer expects to meet its annual net profit guidance of $1.59 per share. It did, however, repeat its forecast for annual earnings of $2.16 per share, excluding non-cash qualified pension expense, restructuring charges and mark down reserves.
The company's top shareholder, hedge fund manager William Ackman, told Reuters he was not worried about the results, rather he said, "I'm excited".
(Reporting by Phil Wahba in New York, Nivedita Bhattacharjee in Chicago and Lisa Baertlein in Los Angeles; Editing by Gary Hill, Richard Chang, Matthew Lewis and Jonathan Hopfner)