High Losses for Penney, but Shares Jump Higher

Shares in the company jumped 8.4 percent after it reported quarterly results that included a slowdown in sales declines and the prospect of rising profit margins during the all-important holiday season.

The spate of promising news suggests that Penney has bought itself some breathing room as it takes on its third self-help campaign in two years. Though the retailer’s executives acknowledged that much work lay ahead, they said repeatedly that the next few months would reflect even more progress.

“We’re making significant strides toward restoring J. C. Penney to its rightful place in retail,” Myron E. Ullman III, the company’s chief executive, said in a conference call with analysts. “It’s hard work, with no quick fixes, but our teams are rising to the challenge and our customers tell us they love the progress we’re making.”

Yet Penney’s revival remains far from certain, with the retailer’s stock still 70 percent lower than it was at the same time two years ago. Its room for error remains small, especially compared with better-performing rivals like Macy’s and Kohl’s.

The company reported an adjusted net loss of $457 million for the three months that ended Nov. 2. That amounted to a loss of $1.81 a share after excluding certain one-time charges and gains. Analysts on average had expected the company to lose $1.77 a share, according to estimates compiled by Standard & Poor’s Capital IQ.

Using generally accepted accounting principles, the retailer lost $489 million, or $1.94 a share. Additionally, total sales fell 5 percent, to $2.8 billion.

But investors and analysts appeared more focused on the future. Sales at stores open at least one year rose just under 1 percent last month, for the first time in nearly two years, a trend that management said it expected to continue through next quarter.

While gross margins fell to 29.5 percent for the quarter from 32.5 percent a year ago, in large part because of steep discounts, executives argued that Penney needed to take the hit to clear out merchandise associated with a previous failed strategy. Those items should be gone by the first quarter of 2014.

Online sales rose 24.5 percent, to $266 million.

Mr. Ullman, who returned to the job of chief executive earlier this year, has been working to undo one of the most prominent failures in recent corporate turnaround history. During the 17-month tenure of Ron Johnson, whom the company ousted this spring, the retailer’s stock plummeted more than 50 percent.

Mr. Johnson’s ambitious plans to eliminate discount sales drove away customers, prompting him to issue an apology in February after Penney reported a $552 million quarterly loss.

Penney became further embroiled in controversy in the summer after Mr. Johnson’s former backer, the hedge fund manager William A. Ackman, publicly feuded with his fellow board members, going as far as to publicly leak confidential director deliberations. Mr. Ackman resigned in mid-August and, two weeks later, sold his 18 percent stake in the company.

Last month, Penney agreed to abandon efforts to sell a broad range of home products designed by Martha Stewart, surrendering in a long-running branding war with Macy’s. The move, which also involved returning 11 million shares in Martha Stewart Living Omnimedia, was another unwinding of Mr. Johnson’s legacy.

Even Penney’s efforts to shore up its future, like the sale of 84 million new shares in late September to help finance the turnaround, prompted a plunge in the stock price. The company wagered that the move was worth the hit, since it now expects to have more than $2 billion in cash and available credit lines by the end of its fiscal year.

DealBook: Two More Hedge Funds Scoop Up Stakes in J.C. Penney

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DealBook: His Ties Severed, Ackman Moves to Sell Stake in J.C. Penney

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DealBook: J.C. Penney Shares Jump on Report of Push for Permanent Chief

Interim Martha Stewart Ruling Favors J.C. Penney

Beleaguered J.C. Penney got a piece of good news on Friday, when a judge ruled it could — at least temporarily — sell a plethora of Martha Stewart-designed housewares under the JCP Everyday label.

Justice Jeffrey K. Oing of New York State Supreme Court, where Macy’s is suing J.C. Penney over its plans to sell Martha Stewart’s housewares, cited this week’s dismissal of the Penney chief executive, Ron Johnson, as one factor in his decision, describing him as “the architect of this entire dispute.”

In considering whether to stop Penney from selling the housewares, “I cannot ignore the reality of the harm to J.C. Penney, even if it is the result of its own acts, but the acts, I believe, were spurred on by their former C.E.O.,” Judge Oing said. The judge denied Macy’s motion for a preliminary injunction against Penney and declined to broaden an existing injunction against the Martha Stewart company.

Had Penney lost the ruling, it would have meant potentially getting rid of already produced items – at a loss of up to $100 million, according to an estimate in a Citi research report – along with having empty shelves when it unveils its new home departments in May.

The trial resumed on Monday after Penney, Martha Stewart Living Omnimedia and Macy’s — which is suing them both on claims they violated a contract over where the branded goods could be sold — failed to reach a settlement during a court-ordered monthlong break.

Macy’s, which has sold Martha Stewart products since 2007, argues that its contract prevents Ms. Stewart’s company from selling her home goods to competitors. However, there is an exception for sales at Martha Stewart stores.

Penney and Ms. Stewart’s company argue that, because Penney’s will set up boutiques within its department store for the products, that satisfies that exemption. They also argue that Penney should be able to sell housewares products designed by Ms. Stewart without her name on it.

Penney is still not allowed to sell Martha Stewart-branded products in housewares categories, and it has not produced any of those. But it can sell the JCP Everyday products without using the Stewart brand name in advertising those products, Justice Oing said. “I don’t want to see it in advertisements, in any brochures or promotions. You are to stay away from the Martha Stewart brand,” he said.

Penney does not get a total pass – it is just allowed to sell the products for the time being, and the judge left the door open for Macy’s to come back and claim harm once the actual sales data came in. And, of course, the final ruling could either allow Penney to or prevent it from selling any housewares designed by Ms. Stewart’s company. (Penney is already selling some Martha Stewart-branded items in categories Macy’s does not have an exclusive agreement over, like window treatments and stationery, which are mostly not at issue and the ruling Friday did not deal with.)

In making the ruling, Judge Oing declined to broaden a preliminary injunction from July that prevented the Martha Stewart company from producing goods with Ms. Stewart’s brand on them for J.C. Penney. That July injunction halted a central part of Penney’s strategy, which was to build stores-within-a-store featuring Ms. Stewart’s name and products. The boutiques have not been built, and J.C. Penney has no Martha Stewart-branded items in production.

As a workaround, given the injunction, Penney developed a brand called JCP Everyday to put on housewares designed by Ms. Stewart’s company. Macy’s is trying to get the court to reject those as well. Macy’s argues it has an exclusive contract with Martha Stewart to sell certain categories of housewares — including bed, bath and kitchen products — and Penney should not be able to sell either Stewart-branded products or Stewart-designed products in those categories.