J.C. Penney Blames 3Q Losses on Shrinkage; Sees Gains in October

J.C. Penney’s turnaround from a company on the brink of financial ruin is still a work in progress.

The retailer announced its fiscal third quarter results on Wednesday, which included net sales of $2.78 billion, compared to $2.93 billion for the period in 2012. Comparable store sales declined 4.8 percent for the quarter, which the company calls a “sequential improvement,” when compared to the second quarter of fiscal 2013.

But the quarter ended with a positive (though modest) 0.9 percent comparable store sales gain in October, the retailer said, with sales results improving sequentially each month compared to the same period last year, and also reflecting sequential increases throughout the quarter. 

Top-performing categories for the store include fine jewelry as well as women’s and men’s apparel. The company opened 30 new Sephora stores inside J.C. Penney locations in the third quarter, bringing the total number of in-store locations to 446. 

“Our strategies to reconnect with customers are beginning to take hold, and this became increasingly clear as the quarter progressed,” said CEO Myron E. Ullman III in a statement.

According to Yahoo Finance, Ullman told analysts that shrinkage significantly impacted the bottom line in the third quarter, hitting gross margins by 1.1 percent, more than what was seen in the prior three months; the loss of inventory grew by more than $300,000 during the period. He blamed a company-wide changeover in security tags. Stores replaced the old-school sensor security tags with RFID-chipped tags, Ullman said, and during the switch, the sensor tags fooled with the efficacy of the RFID chips, making it easier for people to walk out the door with merchandise. 

Yahoo Finance characterizes the sky-high shrinkage as “a stunningly high price to pay for transitioning to an RFID system that’s already more expensive than what it replaced.”

But retail’s big thinkers, including the megabrains at New York consultancy PSFK, consider RFID-chipped tags to be the future, allowing stores to enhance customer experiences and pave a smooth road toward true omni-channel retailing. If that turns out to be true, looking back, $300,000 will seem like a pittance to have paid.