Despite Shaky Start, JC Penney Stands Firm on Reinvention Plan

While First-Quarter Results Are Grim, Analysts Appear to Be Giving Retailer Room to Breathe

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JC Penney lost $163 million in the first quarter. Sales skidded 20%; traffic slowed 10%; conversion and average customer spending both fell 5%.

Grim results indeed. But don't expect CEO Ron Johnson, President Michael Francis and the rest of the crew to throw in the towel on their retail-revolution plan just yet.

JCP spots tout the retailer's reinvention.
JCP spots tout the retailer's reinvention.
Not only are these execs staking their reputations on the success of JC Penney's reinvention -- Messrs. Johnson and Francis left Apple and Target , respectively -- but they've publicly committed for the long haul. They have warned that the aging retailer won't be "transformed" until 2015. And it's not until next year, when JC Penney won't be up against comparisons to its promotion-riddled past, that they say real change will be evident.

The test will be whether investors give them that long. While the stock fell 20% in the days following the first-quarter announcement, many analysts appear to be giving the retailer room to breathe.

"We note that this is still the very early phases of the most significant restructuring and repositioning of a major retailer that [I] have seen in [my] career," wrote Michael Exstein, an analyst with Credit Suisse.

Charles Grom, an analyst with Deutsche Bank, expects that even if comparable-store sales remain down in the high teens throughout the year, JC Penney will not deviate from its overall strategy. "While weaning customers off promotions is proving to be difficult, [Ron Johnson] is confident that the new pricing policies are the right -- and only -- approach to achieve [his] vision," Mr. Grom said.

Pressure will almost certainly increase, however, if results continue to be weak through the key back-to-school and holiday seasons. Perhaps in recognition of that reality, Mr. Francis highlighted a slew of new brands and expanded partnerships launching this fall and holiday season. The JCP label is slated for an August debut, while assortments from Puma and Nike will be expanded beginning this fall. Designer Cynthia Rowley's Dream Pop collection for girls 7 to 14 will also launch this fall, as will a collection from DC Shoes that targets young men. Collections from Betsey Johnson, Vivienne Tam and Lulu Guinness are also planned.

Mr. Johnson emphasized that 2012 is "not a throwaway year," saying JC Penney expects to earn money through the transformation and is sticking by its 2012 earnings guidance.

Though the retailer faces plenty of critics and will need to weather its fair share of negative headlines, some analysts remain optimistic -- even bullish. "Although we've previously stated that the turnaround would take time, today we are even more impressed by how quickly the company is moving in its transformation," said Paul Swinand, an analyst with Morningstar.

Among the most pressing issues the retailer faces: clearing up confusion surrounding its pricing strategy and lack of coupons, as well as selling basics. Fashion items are moving, Mr. Johnson said, with items in the monthly catalog selling out. But basics are suffering, because consumers had used promotions and coupons to "fill their sock drawer … their underwear drawer," Mr. Johnson said. Presumably, those are now full.

Several changes are on tap to better communicate the pricing strategy and wean consumers off the coupon "drug." Every Thursday or Friday for the foreseeable future, JC Penney will be running newspaper ads in major markets highlighting its month-long values. Marketing messages will also carry the current price, compared to the previous price, to better illustrate the value for consumers. In stores, price points will also be added to mannequins.

Though it's been challenging to educate consumers about the new pricing strategy, there have been some indications that it's working. Mr. Johnson said that a year ago, only one out of every 500 items was purchased at regular price. During the first quarter, 67% of products were purchased at the highest ticketed price.

"This is profound," Mr. Johnson said. "People are now buying at the first price, [the] right price. That's the dream of every retailer."

He added that the changes are enabling JC Penney to act more like a startup -- nimble and fast, with little time between learning and action.

"Our first 90 days are a little tougher than we expected," Mr. Johnson admitted. "But the good news is the transformation, from my perspective, is way ahead of schedule. … We're trying to essentially convert the Titanic into 1,100 WaveRunners."

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