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 2:56PM

Please send Johnson to a Psych 101 class... he doesn't get it.


JCP customers aren't the same as Apple customers.

Jun 27, 2012 5:57PM
Instead of these alienating new pricing "schemes," perhaps the CEO should focus on fundamental retail basics: Offering a quality product at a fair price with decent customer service in a clean and organized store.  I don't know why these MBA geniuses feel the need to justify their exorbitant salaries by "re-training" the customer with these unduly complicated sales structures that defy human buying patterns.  The money-spending customer is not the issue here...the overall JCP shopping experience is.  Give us a product we want at an affordable price. Why not cater to the customer instead of condescendingly implying that the company is failing because us lowly buyers are not enlightened enough to understand these tactics?  Oh, we know what we want and we're voicing it with our wallets.  We don't want to be tricked, suckered or marketed to, we will shop where the customer is valued, in pricing and service.  Right now, this overpaid "genius" CEO is putting a whole lot of "best price" lipstick on a pig. 
Jun 27, 2012 1:38PM
Maybe Ron Johnson is the one who needs to be weaned off $53 million a year.
Jun 27, 2012 2:52PM
"Extreme makeover" - from family store to gay store. Business should never mix business with religious, politics or social issues. It should take a neutral position on all of the three previous mentioned. If JC Penney wants to come out of its comatose state, it should first fires Ron Johnson and save $$$$$$$$$$$$. In addition,  I don't believe anybody should get paid 53 million to run a profitable business. This is another reason for me not to shop at the store. I will not spend my money there to support an inneficient and over glorified  so called job creator.   
Jun 27, 2012 2:55PM
Quality now is so poor.  They do not carry the traditional lines for which they were always noted.  I am actually paying more now.  I knew this was a bad move from the start.  JCP, go back to carrying quality items and having sales !  Until then, I won't be back.
Jun 27, 2012 3:29PM
The new catalogs are ridiculous. Penney's quality isn't what it used to be. I used to buy the St. Johns Bay shirts when they were actually durable and didn't shrink  to a hand puppet after a few washings. Like others have stated, the inventory always looks low. Bring back some stock, the coupons, and fire Ron. Of course give him  a  $ 6 million dollar or so severence package for tanking the company.
Jun 27, 2012 2:50PM
I've shopped at JCPenneys since I was 15 and I'm now 54. Aside from the change in prices and displays which I do not care for is the bigger problem. They've dropped their quality in order to tag the items a lower price and in some instances with home items the prices have actually gone UP. The switch to lower quality items though is what makes me upset. I counted on JCPenneys to give me a well made suit or skirt and I was willing to pay for that quality. Now I am seeing cheaply made items that will wear out in 3 washings. Obviously a marketing stratedgy to get us back into the store to buy more cheaply made items. But it wont work for this long time JCPenney customer. I'm finding I go to other places whether online or brick and mortar because in the end I really do want QUALITY items for my hard earned dollar. And if they insist on keeping this ridiculous set up then for goodness sake STOP with the garage sale red tags used to price things. It does NOT feel high end at all but rather feels like I'm at a bargain basement close out...I go to garage sales for that kind of thing.
Jun 27, 2012 2:02PM

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.


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. 

Jun 27, 2012 1:00PM
Whether you want to write about it or not, the gay angle on choosing a spokesperson didn't help either.  I think Ellen comes off nice, but the political issues that come with it  cannot be separated out for many Americans.  Now I hear they are promoting gay couples in their ads, which to me, is an in your face strategy that is going to have consequences. Ellen had a persona that didn't have anything to do with her sexual orientation. 

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

Jun 27, 2012 3:29PM
The prices got cheaper and so did the merchandise. I don't like Penny's anymore.
Jun 27, 2012 12:25PM

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....

Jun 27, 2012 12:58PM
As a current JCP employee I can say it really is NOT what it used to be. We get in serious trouble if we are not excited about all the changes. These changes mean as little as 2 cent raises for the YEAR,, a cut in help and hours. In August they they will be removing the registers from the childrens dept. and cutting our work force even more. I think them building all the little shops inside the JCP stores and making all these changes is just a way to liquidate assets. I don't think they will be around in another 5 years, it is really that bad. We get items in and they are marked "best" price before they even hit the floor. I am every other person in my department are looking for another job. We are just done, we have been pushed over the limit. JCP we wish you had just left well enough alone.
Jun 27, 2012 1:02PM
Penney's stand endorsing homosexualality has been a major factor. Evangelical Christians have moved their business away from Penney's ,Target. Home Depot and Macy's. Why they would go out of their way to offend families is why JCP is down 20%. Keep it up and see more losses.
Jun 27, 2012 5:59PM
I used to love shopping at JcPenney!!!  They had the best brands of clothing for my entire family!  However, since they went "cold-turkey" with the coupons... I feel like I'm not getting a bargain anymore.  I've only shopped there once since they changed.  I purchased three shirts and paid over $100!!!  Now I shop at Kohl's and I NEVER liked them before.  Bring back the coupons!!!! Keep the "boutique" merchandise at the boutiques.
Jun 27, 2012 12:11PM
I agree with disappointed shoppers comment.  I was also a loyal customer of JCP for over 20 years and I loved the coupons that I received by mail or email.  I would actually go to JCP and find something to buy so I could use the coupons.  It was the thrill of the sale that kept me visiting the store and, of course, I liked the mechandise that I purchased! 
Jun 27, 2012 3:40PM
When I walk out of a JCPenney store empty handed, something is desperately wrong. I loved shopping with coupons. That way I made my own bargain. I loved not having to stand in enormous lines--now there is one "Customer Service Center" on each floor and the lines are a mile long. The new CEO is driving the store into a deep, dark hole and I fear it will never come out of it alive. There are several stores here in my area, but one of the newest one is very disorganized. Went into another one and was told if I wanted any of the  youth shoes, I had to find them myself. Not a hint of service. By working five days a week, by the time I get to the store on the weekend, all the "bargains" are already gone. I think the handwriting is on the wall--if the new CEO doesn't change his policies, he isn't going to have anything to be CEO of.
Jun 27, 2012 12:18PM
As a former JC Penney employee, I am appalled at the direction the company has been taken in.  James Cash Penney  if still alive would never have let this happen.  The customer was always his primary focus and JC Penney has lost that.  Start focusing and listening to what your customers want and they will come back.  Go back to how things were.  Like the old saying goes if it ain't broke don't fix it.
Jun 27, 2012 12:19PM
still not listening to the consumer and what we want . i bid you goodbye
Jun 27, 2012 12:53PM

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!

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


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.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
264 rated 2
485 rated 3
679 rated 4
640 rated 5
617 rated 6
632 rated 7
493 rated 8
276 rated 9
153 rated 10

Top Picks

TAT&T Inc9



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.