Can Martha Stewart Help J.C. Penney's Turnaround Effort?
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Macy’s (NYSE: M) and J.C. Penney (NYSE: JCP) have been fighting over the right to carry products from the Martha Stewart Living line for most of the year. Judging by the earnings reports the two retailers released this week, J.C. Penney has a lot more to gain from being able to sell the products than Macy’s.
Macy’s and J.C. Penney released their third quarter earnings reports, and as expected Macy’s did well. However, J.C. Penney did much worse than most investors and traders expected. I am not saying that selling Martha Stewart products will be the saving grace for J.C. Penney. However, being able to add the product to its growing line of popular brands should help it attract new customers, as well as the old ones it ran off with a change it its sales policy.
All year, J.C. Penney and Macy’s have been embroiled in a legal battle over which store can carry the brand from Martha Stewart Living Omnimedia (NYSE: MSO). At issue are a string of products from the Martha Stewart Living line, such as dinnerware and bedding. Macy’s has sold the products for years, but at the beginning of this year, Martha Stewart inked a deal with J.C. Penney to sell them, too. Macy’s immediately cried foul, concerned that Martha Stewart was violating the agreement it had with it.
To halt the sales in J.C. Penny stores, Macy’s filed for and received a preliminary injunction against Martha Stewart Living. It is being appealed. One of the most recent developments in the case happened at the end of August when a New York State Court judge declined to rule that the products could not be sold in J.C. Penney stores.
The final outcome of the legal wrangling is important for both stores. J.C. Penney's earnings have suffered significantly this year, thanks to a failed attempt by CEO Ron Johnson to change the company’s marketing strategy. J.C. Penney investors, as well as customers, squawked about a new pricing policy the retailer rolled out earlier this year. It called for the doing away of sales and coupons; replacing the traditional marketing tools with so-called everyday low pricing.
The non-popularity of the change is reflected in the company’s third quarter earnings. Earnings per share were $.07; the Street expected $.93. Sales were $2.93 billion, which was a 26.6% decrease from sales for the same period in 2011. Same store sales fell 26.1%. There were still operating losses, but they at least narrowed to $156 million from $171 million. For the nine months ended Oct. 27, J.C. Penney’s total net sales were down 23.1% to $9.1 billion.
Macy’s did much better. Its sales for the third quarter were roughly $6 billion, which was up from 2011’s third quarter by 3.8%. For the year to date, Macy’s sales totaled roughly $18 billion, compared to about $17.6 billion for the same period in 2011. On a same store basis, third quarter sales from Macy’s were up 3.7%.
In a sign that its future performance will continue to improve, Macy’s increased its full-year 2012 earnings guidance to $3.35 to $3.40 per diluted share. That includes fourth quarter earnings guidance of $1.94 to $1.99 per diluted share. Furthermore, Macy’s raised its guidance for same-store sales growth in the second half of 2012, from 3.7% to 4%.
Unfortunately, we have no clue about J.C. Penney’s thoughts about its future because it offered no guidance for the year when it reported its third quarter earnings.
Johnson has suffered tremendous criticism for the changes he’s making to the company’s pricing policies. He’s trying to correct that, and I like the idea of the shops-within-a-shop idea he has for the store. This includes one for Martha Stewart merchandise, which is indeed popular among consumers; hence the battle between J.C. Penney and Macy’s.
I expect to see J.C. Penney continue to spiral downward over the next several quarters, just as it has all year. When retailer Dillard was working through its turnaround plan, it took nearly two years for things to pan out. With the bad shape J.C. Penney is in, much of it self-inflicted due to that confusing pricing policy change, it may take it even longer to rebound.
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