Turnaround Tales from JC Penney, Best Buy
JC Penney and Best Buy are turnarounds in the making, but that's where the comparisons stop. Each is attacking its problems differently. And when both retailers release earnings this week following a promotion-prone holiday season, it won't be just investors scrutinizing their progress. The marketing and ad worlds will also be watching to see who is closer to succeeding.
If the stock prices foreshadow anything, Best Buy is leading. The Minneapolis-based chain, with revenue of $44 billion, has already achieved $550 million in cost savings since its turnaround strategy was unveiled in November 2012. Called "Renew Blue," it focuses on rejuvenating areas like online shopping and customer service. The retailer, however, did stumble some over the holidays: Even as its market share grew 2%, same-store sales fell 0.9% in November and December due to aggressive price promotions. Still, trading at about $24, the stock has more than doubled from early last year.
Since April 2013, when JC Penney embarked on a turnaround of its turnaround -- former CEO Ron Johnson billed his efforts as a turnaround too, of course -- it has streamlined by announcing plans to close 33 stores and reduce headcount by 2,000. But its main comeback strategy entails returning to the discount price roots abandoned under Mr. Johnson, who favored a failed everyday low price strategy. Since Mr. Johnson was replaced by Mike Ullman last April, the chain has reinstated deals and popular house brands, but it's still struggling to increase consumer traffic and conversion. Its shares, at nearly $6, have lost about three-quarters of their value since Jan. 1, 2013.
Best Buy and JC Penney do have several things in common: They are discovering that re-training consumers on what to expect at their stores is no easy task. Best Buy is fighting consumer perception that it doesn't have comparable prices to internet giant Amazon and that its sales associates' technical expertise is lacking. JC Penney is seen as a firm that wasn't promotional enough under Mr. Johnson and can't compete with Macy's, both online and in-store.
Both retailers are also being navigated by marketing teams that have undergone massive changes. And, interestingly, neither retailers' top marketer boasts the CMO title. Last summer JC Penney tapped Debra Berman, a former Kraft Foods alum, to lead marketing. She wasted no time in tapping Doner, EVB and Victors & Spoils and is in the process of building out a marketing team decimated under the previous regime.
Since the announcement of Renew Blue, Best Buy has lost both its top digital exec, Stephen Gillett, and its top marketer, Drew Panayiotou. Scott Moore took over Mr. Panayioutou's duties.
Yet there's also a clear divide between these two retailers. Best Buy is expected to be profitable this year, despite sales and earnings declines. JC Penney, on the other hand, is anticipated by Yahoo Finance to bring in slightly less revenue than a year ago, in addition to posting fourth-quarter and full-year losses.
JC Penney and Best Buy executives declined to comment.
What's concerning analysts is that $13 billion JC Penney didn't provide a detailed holiday sales report in early January and followed suit with an equally simple quarterly sales report on Feb. 4. No news was not good news for the company's stock, which has shed nearly 40% since Dec. 31.
"They aren't excited anymore," said Rick Snyder, senior consumer retail analyst at Maxim Group, referring to the company's January press release, which simply said the company was "pleased" with holiday sales. Since JC Penney is up against easy comparables -- it shouldn't be hard to beat 2012's dismal results when same-store sales plunged 31.7% in the fourth quarter and it reported full-year net loss of nearly $1 billion -- Mr. Snyder said this could indicate the company does not feel too positive.
"A lot of times, it's more important what they don't say than what they actually say. So if they don't say anything, I take that to be bad news," said Mr. Snyder, who expects fourth-quarter same store sales to increase just 3%. JC Penney said in February that the quarterly comps actually rose just 2%. Mr. Ullman, however, said in the February statement that the company made good on its "promise to generate positive comparable store sales growth."
The January and February press releases were in contrast to a report released in early December, when the company said same-store sales in November rose 10.1%. In fact, late last year, it seemed JC Penney had improved. In the most recent third-quarter call in November, Mr. Ullman said same-store sales were positive in October for the first time since December 2011. Strong enough, it seems, to start markups.
"The environment, as you know, is very aggressively promotional, and we must and will compete to win," Mr. Ullman said on the earnings call. "That means initially marking up our goods to sufficient levels to protect our margins when the discount or sale is applied."
"They aren't excited anymore," said analyst Rick Snyder of JC Penney.
Recovering margins is a hard proposition, said Paul Swinand, an analyst at Morningstar. The company has been stuck for two years with overhanging inventory, he said, affecting margins because JC Penney keeps "going way under their sales plan."
On the brand side, Mr. Ullman is working to reconnect with former customers. To draw in kids, he added Disney shops to 565 stores in October. He said the company has seen traction with brands such as Nike, Levi's, Dockers and Izod. He's also been busy unraveling his predecessor's decisions. St. John's Bay was brought back, while Justin Timberlake's fashion line William Rast will be ousted in June. The home store has been a big area to fix as well, and Mr. Ullman said the change of merchandising home areas by category, rather than brand, has seen "terrific results." The firm also relaunched its JCP Rewards program.
Marketing has also been key. In November, Ms. Berman unveiled an upbeat holiday campaign that emphasized value. It's also advertised on this year's Olympics, touting a new tagline, "when it fits, you feel it," and it is a sponsor of the Academy Awards.
But while this week's earnings call will be an important marker for JC Penney, some say the intense scrutiny of achieving a turnaround during the all-important holiday makes it too early for Mr. Ullman's plans to be fairly judged. "It will be hard to declare victory until you get a really positive holiday," Mr. Swinand said. However, he added that so far it doesn't look good. "If I take some steps back and look at the year as a whole, they've taken two steps forward and one step back. [The turnaround] is probably a little slower than I'd hoped."
What could really derail the turnaround is its cash position. JC Penney said it ended the year with more than $2 billion in liquidity, though it had $9.23 billion in debt at the end of the third quarter. Mr. Snyder said based on his projections he expects the company to run out of cash in third quarter of 2015. If cash flow keeps dwindling, it could potentially affect several areas of the business -- the company could have a hard time paying interest expense on existing loans and the ability to pay for expensive marketing efforts could take a hit.
By late 2014, if the company does not improve operations significantly, said Charles Patton of Patton Investment Advisors in a Jan. 30 report, it may not be able to secure more financing from lenders. "If this happens," Mr. Patton wrote, "It will be 'Game Over'."
Best Buy's Breakthroughs
Best Buy, with more time to enact its turnaround, is sitting prettier.
"Looking back a year and a half ago, [Best Buy] is certainly in a better place than it was then," said RJ Hottovoy, an analyst at Morningstar. "They're in the midst of a turnaround. They've done a great job on the cost cutting and [improving] inventory issues and store renovations."
Not only does Best Buy expect to easily reach its stated goal of $725 million in cost reductions, it's intimated it will likely surpass that figure thanks to CEO Hubert Joly's confidence in reaching "new levels of frugality." Best Buy isn't widely expected to close many stores -- it shuttered only two large-format stores this year, after shuttering 50 stores in 2012 -- though it could stand to trim some middle-management staff, several analysts said. On Jan. 30, the company revealed it had laid off 950 workers in its Canadian division.
"We're just warming up," Mr. Joly said on an early January call. "I'd like you to feel that this management team is not shaken by this bump" in holiday sales.
The firm's lackluster holiday report, also hurt by soft mobile-phone sales, took a toll on turnaround expectations. In an unusual move, the report was backed up by a statement from Best Buy Founder and Chairman Emeritus Richard Schulze, who said he has "complete faith" in the company's long-term strategy.
For Scott Tilghman, senior analyst at B. Riley & Co., the January news was surprising, but he said Best Buy was right to stake its claim within the overly promotional holiday environment. "The last thing you want to do is stand back and let everyone else fight for that business. Customers tend to re-shop the stores they went to last," he said.
Mr. Tilghman said he thinks Best Buy's pricing now is competitive across consumer-electronics retailers and that the firm has an appropriate level of products available -- advantages it should be more heavily promoting. He's also not too worried about showrooming, a phenomenon that Best Buy has embraced wholeheartedly.
"Quite frankly, for those types of product, people like to take it with them," Mr. Tilghman said, versus seeing the product in stores, researching it and then leaving to buy later online, the definition of showrooming.
Still, Mr. Hottovy said he thinks the company has to "win back customers who were turned off by higher prices and less-than-optimal customer service." Mr. Joly echoed that, saying the company has to be price competitive in order to "define our market share," which he said rose 2% during the holiday period, even when it comes with higher-than-expected costs like eating into revenue and margin levels.
The firm has seen positive results from other turnaround efforts. Store-within-a-store has been a successful concept, said Citigroup analyst Kate McShane. She said the company's Samsung Experience and 500 Microsoft shop-in-shops have added a higher degree of service the stores need, and she said the market would reward any further announcements of additional shop-in-shops.
"It helps distinguish them as a go-to location for these types of products," said Mr. Tilghman. The chain will also likely explore more exclusive product, or product launched exclusively at Best Buy, such as laptops and mobile phones, in order to drive traffic.
"They're not going to go anywhere," said analyst Stephen Baker of Best Buy.
Online is another area of improvement: Sales rose 23.5% on a comparable basis during the holidays to $1.32 billion, thanks to higher traffic and average order value, Best Buy said. E-commerce now comprises 11.5% of domestic revenue, said CFO Sharon McCollam, and the company will continue to focus on growing that division; as of Jan. 6, Ms. McCollam said all 1,000 of the company's big box stores were shipping product as fulfillment centers, compared with 50 stores a year ago.
On the marketing front, Best Buy is putting a lot of faith in data. The retailer said it will turn to personalized emails in 2014 to better communicate with customers and explain technologies. Mr. Joly noted the company had been "investing all year aggressively in our capability of bringing our database together." Best Buy has 40 million customers enrolled in its loyalty program, My Best Buy. Ms. McCollam also said gifting and "price-point focused marketing" will be two focuses in 2015. Best Buy works with agencies including CP&B, Razorfish, Rapp, Olson and Wunderman, according to Ad Age's National Leading Advertisers report. Starcom USA handles media buying and planning.
Perhaps most importantly, Best Buy has the money to finance marketing and store improvments to further its turnaround. Best Buy's net cash position at the end of the third quarter totaled $501 million, according to Ms. McShane; she said that is the company's largest cash level since the first quarter of fiscal 2012.
Indeed, Best Buy is likely here to stay. "They're the biggest seller of consumer electronics in the U.S. They're not going to go anywhere. Their success is totally intertwined with the success of the consumer electronics business," said Stephen Baker, VP-industry analysis at NPD Group. "And, frankly, that's a pretty mature, challenging marketplace, and it's not really a high-growth business anymore. You always have to view their results in that light."