J.C. Penney margins plunge, CEO says changes coming

Retailer J.C. Penney Co Inc's operating margins plunged in the first quarter on weak sales and heavy clearance deals, as its new chief executive promised more promotions and a return to basics to win back shoppers.

Penney, struggling with mass customer defections after a failed strategic shift by former Chief Executive Ron Johnson, said gross margins came in at 30.8 percent, nearly 7 percentage points lower than a year earlier.

Total sales and same-store sales both posted double-digit declines, in line with the company's warning last week.

Myron Ullman returned to Penney as CEO last month to stabilize the company, which suffered a 25 percent drop in sales last year after Johnson tried to wean the retailer's price-conscious customers off coupons.

"We need to make a connection with the customer that is meaningful as well as enduring. This won't happen overnight, but customers will begin to see important changes in the coming months that are aimed at meeting their need," Ullman said on a conference call with analysts. "Rest assured, we recognize the magnitude of the challenges that we face."

Since returning as CEO, Ullman moved to shore up Penney's finances ahead of the ordering period for the holiday season with a $1.75 billion loan arranged by Goldman Sachs.

He also launched an ad campaign that apologized to shoppers, and brought back more intense discounting, including doorbusters on Mother's Day.

"Trends are improving - this is still a year of change. But things are stabilizing and traffic is improving," said Marie Driscoll, an independent retail analyst.

Earlier this week, rivals Kohl's Corp and Macy's Inc h each reported lower than expected same-store sales for the quarter, noting how cautious shoppers in the lower-to-middle class remain. But those Penney rivals did say they expect sales to rise this quarter.

Penney posted a net loss of $348 million, or $1.58 per share, compared with a year-earlier loss of $163 million, or 75 cents per share.

Excluding restructuring charges and other items, Penney posted an operating loss of $1.31 per share in the quarter. That was worse than even the most pessimistic of Wall Street estimates compiled by Thomson Reuters I/B/E/S.

Penney shares fell 1.5 percent to $18.50 in after-hours trading following the results.

(Reporting By Phil Wahba and Ben Berkowitz; Editing by Bernard Orr)