Here's what the leaders of Macy's and J.C. Penney say after the benefits

Last week, Macy & # 39; s (NYSE: M) and J.C. Penney (NYSE: JCP) Both reported uninteresting results for the second quarter of fiscal 2019. Macy's just barely made a seventh consecutive quarterly increase in same-store sales, and this at the expense of its profitability. Conversely, J.C. Penney 's profitability improved, but sales plunged 9% from the previous year.

The shares of both retailers have lost more than half of their value over the last year. Macy's shares are now trading at their lowest level in nearly 10 years, while J.C. Penney shares have fallen into the penny share class and recently reached a new all-time low.

Macy's action performance against J.C. Penney. Data by YCharts.

That said, the leaders of Macy's and J.C. Penney believe they can change things. Here are some of the highlights of their remarks on retailer's call for results last week.

Macy's will focus on the costs, inventory management and improvement of its best stores

Excluding gains on asset sales, Macy's Adjusted EPS decreased by 40% compared to the first half of fiscal 2019, despite flat sales. Management expects to achieve much better results in the second half and beyond, regardless of sales trends.

Better inventory management is an essential part of the recovery plan. Macy's came in the second quarter with too much inventory, and weak sales in May and early June forced her to conduct in-depth demarcations to eliminate unwanted seasonal goods. Macy's finished the second quarter with a much healthier inventory position and has planned much more cautious planning for the fall. This should allow it to avoid a repetition of the cuts that have hurt the profit of the last quarter.

Macy's improved its inventory in the last quarter, despite sales below normal. Source of the image: Macy's.

In addition, CFO Paula Price highlighted some long-term initiatives to improve inventory management with the help of new technological tools and improved data analysis capabilities.

Macy's is also looking at reducing its expenses in order to offset the ongoing drawbacks of rising shipping costs related to the growth of its e-commerce business. Management did not spend a lot of time talking about the opportunity here – aside from insinuating that it's significant – but promised more details in a presentation next month.

Finally, CEO Jeff Gennette acknowledged that compressor sales would continue to decline for Macy's "convenience stores", which are roughly half of the worst-performing stores. Yet according to Gennette, these stores have become more profitable as a result of efforts to exploit them more efficiently. Meanwhile, Macy's is directing the vast majority of its investments in physical stores to its flagship stores and its 150 largest out-of-lighthouse sites, which together account for more than half of its physical sales. Macy's investments are leading to better sales trends in these stores.

J.C. Penney wants to excite customers again

In recent quarters, the ability to improve gross margin through better inventory management and loss reduction, the term used in the industry to refer to lost and stolen goods, has been a key theme of JC Penney's call for results. J.C. Penney followed until the last quarter, the gross margin has improved by more than 3 percentage points over the previous year. This allowed the company to reduce its net loss by more than 50% compared to the second quarter of 2018.

J.C. Penney's gross margin increased significantly in the second quarter. Source of the image: J.C. Penney.

That said, compiler sales fell 6% from one year to the next, excluding the impact of JC Penney who left the household appliances category and ended the furniture sales in stores. There is little chance of a return to sustainable profitability without a sales turnaround.

When last week's call for results, new CEO, Jill Soltau, gave investors a first idea of ​​how his team hopes J.C. Penney will grow again. The key feature of the strategy is that management wants to make JCPenney stores an attractive shopping destination.

Under former President Marvin Ellison, the in-store environment was somewhat neglected as J.C. Penney attempted to diversify into new categories of products like home appliances. Soltau and its team plan to change that by disencumbering the stores, installing more attractive displays and offering more individualized style advice. J.C. Penney will also reorganize its marketing strategy to accompany the changes made to its stores.

Should investors believe the hype?

Of course, the key question for investors is whether the recovery strategies outlined by the leaders of Macy's and J.C. Penney are realistic. Both companies have missed their target several times in recent years.

Macy's seems to be a very good turnaround bet right now. There is no doubt that some of the initiatives of management will not materialize, but the company has many levers to generate a return to earnings growth. It's important to note that Macy's has plenty of leeway to develop proven initiatives such as refurbishing its best stores, adding Backstage premium sections to its full-line stores and closing the doors. underperforming locations. He also owns a ton of underutilized real estate that he can sell to pay off his debts.

The recovery case of J.C. Penney is much more speculative. The company is drowning in debt, sales continue to fall, and much remains to be done to break even. In addition, it might be difficult for the iconic department store chain to get rid of its heavy image. Although management has good ideas, only time will tell if they are enough to save J.C. Penney.