JC Penney makeover still bloody painful

The retailer's struggles continue, and it must act fast to stop the hemorrhaging.

By InvestorPlace Jun 27, 2012 9:54AM

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."

Bottom line

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

Jun 27, 2012 1:56PM
Unfortunately the general public is not smart enough to realize what JCP was trying to do with their new strategy.  Do you have to coupons to save money?  Apparently so according to the sales figures.
Jun 27, 2012 1:55PM
J C PENNY must empliment the actions of coupons to bait the consumer into their department stores. The consumer tends to spend funds at a more feroshous rate when coupons are implemented into the equation as for the product being sold. If the consumer feels that a bargin is at hand he or she will be more prone to spend more funds of course with a coupon in hand. It is better to have the bargan in hand than so called included in the price which remains to be seen. Get the picture J C Penny.
Jun 27, 2012 1:53PM
Went into Penneys last week to check out what the hubbub was all about.  I found the signs very confusing, for example the sign in the mens' section said in very large print $12, so my husband picked two pairs of shorts only to have them ring up for $25 at the register.  Upon closer inspection, the sign said in very small print "tank tops".  There were 4 tank tops on the rack and the rest were the $25 shorts.  I faired better in the petites section where I just go off of what fits rather than the pricing, managed to pick up some basics such as black skirt, white cami and denim shorts.   Overall I thought the pricing was a little high and the monthly special was not something we were interested in.  It didn't seem like there were very many "bargains" and that is what is driving people away, imho.
Jun 27, 2012 1:49PM

JCP used to be my facorite store. I could always find what needed. Have been very disappointed lately.

I have nothing against gay people although I don't believe in their lifestyle. Catering to such a small group and offending others is not the way to go. I won't go back.

Jun 27, 2012 1:46PM
Hello JCPenney.  I was once a very loyal customer but the last 2 times I was in a store in Roanoke, VA the store there looked like it was going out of business.  Inventory appears to be at half what it used to be and whoever your buyers are, they don't seem to know style from junk.  I have been a JCPenney shopper for over 50 years, so it is very hard to watch what is unfolding.  If you don't have inventory or sales, buyers will not come in this market.  Get back to your old style which worked for a lot of years.
Jun 27, 2012 1:38PM
Maybe Ron Johnson is the one who needs to be weaned off $53 million a year.
Jun 27, 2012 1:35PM

Maybe it's regional, but I was visiting family in Michigan, and the JC Penney there was awesome I wish I had more money to spend, but I got the most beautiful dress on sale for $19.00.and I have gotten so many compliments about it. Back here in Connecticut I go into JC Penney  and can't find a damn thing.


The other thing is that JC Penney upped the interest on my credit card to twenty-seven percent, even though my credit score is over 700, so I paid it off and I refuse to charge on it again (and paid for the dress in cash).  

Jun 27, 2012 1:31PM

Well the company I work for just signed on to Re-Vamp 8 JC Pennies in florida (we polish concrete) within the next four weeks so therefore they are still gun hoe and doing what they set out to do. I can also say the price and the childrens selections are wonderful and that we as American's should be patient all good things take time and hopefully we can help this American company get back to its peak. Rather then say "you'll never shop there again" try not to be so judgmental and wait to see what the finished product is. Funny how people can say how bad someone is doing at their job but if given the opportunity they wouldn't be able to do it better if at all. These people were not given over 50 million dollars in a year because of talk, they performed and were able to prove their skills. Wouldn't your house look messy if you were remodeling? As for the pricing and selection comments... again, trial and error - they aren't mind readers they have to try new things before they will know if they work. Meanwhile next time you go to JC Penny's take a look at their beautiful polished concrete floor... ECONOMICAL!

Jun 27, 2012 1:31PM
It makes me sick that some of you people will not shop at JCP because they support gay people?? Wow! here is a piece of advice- don't throw stones from a glass house- the most messed up people in this world that I have met are straight- and I am a counselor and work with many, many people. And who really cares that a retail store supports the gay community- it does not change the product they sell. It is so sad to see so many closed-minded people these days. But just remember- what comes around goes around and those who discriminate against others will also be discriminated against. Karma is a bitch! And what are you going to do if you have a child that is gay? Are you going to stop loving your child? If so, then God help you because that goes against everything God teaches us. I'm sorry but you "religious" people that are against gays are anything but truly relgious and when you meet your maker, you will relaize how wrong you are.
Jun 27, 2012 1:28PM
Haven't bought anything in a Penney's in more than a decade and have no intention of doing so again. All their stores in my area are inside malls, the priciest shopping format there is.

The last time I was in a Penney's, the store was dirty, a few articles of clothing were on the floor and the store was pretty much empty. Never again. The only reason I'd even go into a JCPenney's now would be to get to the parking lot in the back of the store where I like to park because there are fewer cars in those lots.
Jun 27, 2012 1:24PM
I shop at JC and did not like the changes.  Example:  If you are looking for a certain brand, say Lark Lane and want to find it on sale, you have to rummage through dozens of other brands on the same sale rack.  They used to put all the same brand on the same sale rack.  I politely emailed them with my concerns only to have the new system re-explained to me (which I already understood and did not like) and why it was better than before.  Nobody actually listened to my customer opinion and addressed the issues I brought up.  I also believe it is unwise for any store to take a stand on social issues and should instead focus on the best quality for the best price with good customer service.  Your customers and employees are capable of supporting the agendas they care about on their own.  
Jun 27, 2012 1:24PM
In the past I could count on one hand the times I've shopped at Penny's in a year but for me I love the changes in the past mouth I've been to Penny's three times.  Love the prices love the way each depatrment is set-up  they even have a Sephora in store.  I do hope people will give  this a chance.
Jun 27, 2012 1:20PM
I'm sorry but I hate coupons and do not have time to toy around with them. I personally love the new strategy of month long low prices and I saved a lot of money when I shopped at JCP about a month ago. I really hope they keep this new way of pricing because coupons are just a pain in the butt for me. I think it is a generational thing- the older people are use to the coupons and it makes them "feel" like they are getting a better deal but I'm in my 30's, I work full time and run a house all by myself and I love that I can go to JCP and get a great deal without having to present a ton of coupons. Come on ladies- you don't need all those coupons now to get a good deal. I think it's just the "change" in the system that makes people nervous- people don't like change and it takes time to adjust. Plus, this system is very green- much less paper and adds sent to my house! I say keep this new system and in time, people will adjust.
Jun 27, 2012 1:20PM

Dear Mr. Johnson,


I sincerely appreciate your new approach to Marketing.  During the last ten or so years my wife felt compelled to utilize every one of JC Penny's sale coupons, flyers and promotions.  She probably averaged over $4,000 per year on her Penny's charge card. 


Your new Marketing approach is wonderful.  Six months into this year and she has charged less than $200.  What an amazing difference.  Please stand your ground and maintain your Marketing plan.  On behalf of all men married to JC Penny addicts we appreciate your efforts!



Jun 27, 2012 1:15PM

Agree, as an ex-frequent shopper at JCP, the coupons is what drove me into the store once or twice a week.  Now I rather go to Kohl's where they have good sales/clearance, good quality and the COUPONS.  Big mistake.


Jun 27, 2012 1:13PM

They can make a living off their gay and lesbian customers. I am done there.

Jun 27, 2012 1:12PM
Sorry CEO,homosexuals don't sell to us JC Penny shoppers. When that angle is disposed of , I will be back.
Jun 27, 2012 1:12PM

If the Customer is truly right and we enjoy our sales and coupons, we will hold out and not buy there.

I hope they have deep pockets while they attempt to "Retrain the public". That is the same public that was a good part of their customer base. My prediction: More loss of sales. Time will prove if I am correct or not. Lets look at the next quarter...


Jun 27, 2012 1:12PM
Man, where is my sales magazine.  This computer just doesn't cut it for shopping!  They better hurry up and go back to normal or they won't have ANY customers back.  Start giving us quality product, like before, and low prices!  I NEVER shop stores, like many women so, you asked us to stop shopping at your store with unfair treatment
Jun 27, 2012 1:07PM

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. 

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