In a first quarter presentation to the financial community and other stakeholders, J.C. Penney Co. reported an adjusted net loss of $55 million but detailed initiatives that it said would transform the business and change the company’s fortunes. The efforts include forging partnerships with Cynthia Rawley, Jonathan Adler, Michael Graves, Bodum and Terrance Conran, which it discussed along with the advance of its Martha Stewart program and the licensing of the Royal Velvet brand.

The adjusted net loss excluded the markdowns taken as a result of the company's continuing efforts to reduce inventory levels to align with its new strategy, restructuring and management transition charges and non-cash qualified pension expense. On a GAAP basis, the company reported a net loss of $163 million.

"Sales and profitability have been tougher than anticipated during the first 13 weeks, but the transformation is ahead of schedule,” said Ron Johnson, J.C. Penney CEO in a statement on financial results. “Customers love the new JCP they discover in our stores. Our shop strategy has been applauded by vendor and design partners, our merchants have stepped up to the challenge of improving our merchandise and presentation, we have dramatically simplified our business model and reorganized our teams at headquarters and in our stores. While we have work to do to educate the customer on our pricing strategy and to drive more traffic to our stores, we are confident in our vision to become America's favorite store.”

Traffic, Johnson said in the presentation, was the main problem J.C. Penney faced in the first quarter and a sharp decline there reflected the curtailment of the retailer’s former discount promotion strategy in favor of a new pricing policy. However, he noted that a company survey revealed that customers who had purchased product recently give J.C. Penney high marks for factors such as store appearance, return policy, price clarity, friendliness of customer service and better value, all of which he attributed to simplified pricing and operations. Michael Kramer, COO, noted that although traffic fell significantly, conversion rate and average spend declined by only 5%, which suggested general customer satisfaction with new J.C. Penney methods.

J.C. Penney executives recently reviewed 3,000 potential new Martha Stewart-branded items, Michael Francis, J.C. Penney president, said. Francis asserted that he expects the product line delivered into an innovative store environment next to herald “the complete transformation of our home world, which is going to have its cornerstone store by Martha Stewart.”

The Martha Stewart shop creates an opportunity to create an exciting neighborhood of shops that will transform the home department at J.C. Penney. Among the other critical elements defining the neighborhood, Francis pointed out:

• A new product line from Cynthia Rawley aimed at girls and tweens.
• A licensed Royal Velvet roll out of furniture, tabletop and window treatments.
• A Jonathan Adler furnishings collection that will focus on style, fun, wit and craft in a manner unique to the department store sector.
• A comprehensive and innovative assortment of Michael Graves products ranging from functional products to giftware.
• A partnership with Bodum that will showcase the brand’s design and operability in a way not seen previously in North America.
• A collaboration with Terrance Conran on a value-oriented furnishings line covering segments from lighting to furniture to home décor.

J.C. Penney executives said the expect changes they are making at the store, some of which already have appeared and more of which are coming for summer and fall, to help it gain financial traction in the second half of the current fiscal year.

Still, the company is feeling the effects of its store transformation. Comparable store sales declined by18.9% in the first quarter.  Total sales decreased 20.1%, which includes the effects of the company's exit from its outlet business.  Internet sales through jcp.com were $271 million in the first quarter, decreasing 27.9% from last year’s period.

Gross margin was 37.6% of sales versus 40.5% in the same period last year. The company reported that overall, compared to last year, gross margin was impacted by lower than expected sales in the quarter and deeper seasonal markdowns to clear inventory coming out of the 2011 fourth quarter. This figure also includes the impact of a $53 million markdown reserve taken as a result of the company's continuing efforts to reduce inventory levels to align with its new strategy. This reserve had a 170 basis point impact on gross margin, so excluding the reserve, gross margin was 39.3% of sales.

J.C. Penney said it anticipates incurring additional restructuring charges throughout the fiscal year as it takes aggressive action to further simplify its operations and its infrastructure. In addition, as the company continues to transform its merchandise assortment to align with its new strategy, it may incur additional inventory write-downs as it exits certain product lines. As a result of its various initiative, the company said it no longer expects to meet its annual GAAP earnings guidance of $1.59 per share, but affirms its non-GAAP earnings guidance of $2.16 per share, which excludes non-cash qualified pension expense, restructuring charges and markdown reserves.