JC Penney makeover still bloody painful
The retailer's struggles continue, and it must act fast to stop the hemorrhaging.
By Susan Aluise
"Genius is an infinite capacity for giving pains," Oscar Wilde wrote. That just about sums up how J.C. Penney (JCP) shareholders are starting to feel about CEO Ron Johnson's strategy to transform the struggling 110-year-old retailer by fusing competitors' merchandising and pricing strategies with the vibe of Apple's (AAPL) Genius Bar.
Just six months into Penney's extreme makeover, one thing is abundantly clear: Ron Johnson's experiment is not going well.
Last week's sudden departure of JCP president Michael Francis, the highly regarded former Target (TGT) executive charged with drawing up a new merchandising and pricing strategy to compete with Wal-Mart (WMT) and others, is just the latest tremor to shake the retailer since it unveiled its new strategy on Jan. 25.
In a tersely worded statement, the company said little more than that Johnson is assuming Francis' duties and will not seek a replacement.
However, Johnson was more candid about the changing of the JCP guard in an interview with Women's Wear Daily's David Moin: "The marketing I largely left" to Francis, Johnson told the fashion industry newspaper. "The fact that it hasn't resonated -- I had to get involved."
Francis' departure was the company's second high-profile executive exit in the past 70 days. CFO Michael Dastugue, a 21-year JCP veteran who had held the CFO job for only 15 months, left the company in mid-April.
So last month, it fell to his interim replacement, COO Mike Kramer, to help Johnson explain JCP's colossal first-quarter earnings miss. The company reported a $163 million loss, compared with a $64 million profit for the same quarter last year -- more than double the loss analysts had expected. The top line was ugly, too. The $3.2 billion revenue is 20% lower than last year's.
And it gets worse: Same-store sales during the quarter fell by nearly 19%. Its margins and store traffic also fell markedly.
After hitting a 52-week high of $43.13 two weeks after Johnson unveiled the new strategy, shares have hemorrhaged half their value. JCP currently is trading around $21.50, having dropped 4% since news of Francis' exit broke last Tuesday. Another pain for investors: JCP suspended its dividend.
Penney's performance was hardly what Johnson had in mind when he and Francis launched the extreme makeover at a posh party in Manhattan in January. That makeover included taking a page from Target's playbook by launching new budget collections from designers like Nanette Lepore (whose real brand graces the racks at Neiman Marcus) and featuring Martha Stewart's home collection.
Penney stores would also be revamped to look like the retail stores Johnson launched at Apple, including a variation on the tech retailer's Genius Bar concept.
But at the core of Johnson's transformation strategy was JCP's new three-pronged Fair and Square pricing scheme: everyday regular prices, "monthlong values" and "best prices" available on the first and third Fridays of every month. JCP customers traditionally have been attracted to the retailer's many sales and coupons. Johnson believes they need to be "weaned off" of those old habits and retrained to buy products at everyday prices.
JCP planned to pony up $80 million a month to advertise the new pricing scheme, the centerpiece of which were TV ads featuring comedian and talk show host Ellen DeGeneres. But many customers found the ads confusing, and the absence of sales and coupons were a good reason to shop elsewhere.
The company has since reintroduced the once-taboo word "sale" into its vocabulary, replacing "monthlong values."
Johnson remains committed to his strategy, attributing the early disappointments to a failure to "communicate pricing strategy to customers."
But here's the thing: Customers loved the sales and the coupons. Johnson admits they "were a drug" that drove traffic. But that hasn't dampened his determination to force JCP shoppers to give up their coupon addiction and go cold turkey.
Forcing change is an epic achievement, if you can accomplish it. The task is far easier if you've cornered the market on a hot tech toy like an iPod or iPad. Johnson had that advantage when he was in the fast and frenzied process of launching Apple Stores. He doesn't have that edge at Penney.
It's only logical that shareholders are getting more than a little antsy about Johnson, who was paid a whopping $53 million last year simply on the promise of turning the company around, as InvestorPlace editor Jeff Reeves discusses here.
Trying to make consumers "realize" that what they want to buy and how they want to buy it is wrong and is, at best, like herding cats. Shareholders will be better served if Penney's "genius" hits pause on his new mantra and replays that time-tested retail motto "the customer is always right."
But until that happens, I'd avoid JCP and all the pains that go with it.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
More from InvestorPlace
Please send Johnson to a Psych 101 class... he doesn't get it.
JCP customers aren't the same as Apple customers.
Penny's is a decent store but what pisses me off is when they do their overhead announcements in beaner speak, spanish
When I hear that **** I drop whatever I was thinking of buying and walk out of the store.
This is America, damn it, stop pandering to illegals and making US citizens listen to some foreign invader language. I'm sick of it.
I will not shop there because of it.
So if anyone reading this is a higher up at Penney's, tell your moron boss to stop with the pandering to illegals and I might shop there again. Same with Sears.
I knew from the beginning that this was going to bomb. As a guy, I really like the JC Penney brand of dress shirts, but I will only buy them if they are a buy one get one sale, or if there is another sale advertised. As a result, no shirts for me.
One other thing turns me off...why does JC Penney have to market toward a certain social position? Why can't companies be neutral when it comes to social issues like gay marriage? Their overt advertising during mother's day and father's day was unnecessary.
Right now, I think JCP is being defiant and Johnson's ego is running the show. I don't know that this can be saved
I was a JCP shopper for nearly all of my adult life and my mother use to shop there with me when I was a child. We LOVED it! The merchandise was upscale enough to look like you were getting something from expensive stores, while at the same time affordable for the working family. When the buyers for the company started replacing the "good" stuff with "cheap" WalMart type of stuff, I quit going. If I want Wal-Mart, I'll go to Wal-Mart and not pay the "good store" price. Then they did away with the catalogs, sales and coupons. It's no longer a treat for me to shop there. I have a news flash for the Bd. of Directors....YOU don't DICTATE how I'm going to spend my money--esp. if you want me to spend it with your company! Suggestion: Fire Johnson...after all.. there's a REASON he's no longer at Apple--esp. if he were all that fabulous!!! No one lets the "golden goose" get away....
The CEO came into a woman's market thinking like a man. Instead of thinking like a man, he needed to think like a woman. Most women brag that they never buy anything full price, thus the sales and coupons motivate them to spend, we don't want you to give us an everyday price and expect us to buy it at that price. I'll wait a few weeks and hope it goes to your best price racks. Men, don't try to change how we shop, just change the way you market your products and prices to us!
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
New legislation is allowing foreign companies to finally invest in the country's vast oil reserves.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.