Despite One Bad Quarter, Don't Discount J.C. Penney's Chances
The strategy -- outlined in January by the retailer's new CEO Ron Johnson -- was designed to revive Penney's sluggish business and redefine department store shopping. They would eliminate the rampant discounting events that taught shoppers to distrust their prices, and that have increasingly led them to wait for final clearance sales to buy.
The retail and investment communities have been watching Johnson with bated breath, to see if the man many regard as a kind of merchant prince could pull it off.
So far, the jury is still out: Penney's first quarter sales tanked.
Down, But Not Done
Due to Johnson's stellar pedigree, the industry isn't giving up on him yet. The man who led Apple's (AAPL) highly successful venture into retail stores, and prior to that, helped burnish Target's (TGT) image as a high-end discounter with exclusive lines from upscale designers like Missoni and Jean Paul Gaultier, will be given more time to work his magic on Penney's.
And other retailers have already begun following Penney's lead. In March, regional department store chain Stein Mart, announced its plans to slash coupons by 50% and return to its everyday low price roots.
But Pietschnig, who was willing to give Penney's new "fair and square" pricing strategy a try, is unimpressed. Worse, she's also skeptical that she's getting a good deal.
"They're saying, 'no more sales,' they're going to give me a rock-bottom price as soon as I walk into a store," said Pietschnig, who spoke to DailyFinance back in March about her penchant for shopping department store clearance racks.
But during a visit to the store the following week, "the stuff was even cheaper -- what the heck was that?" she said. "They made this whole big thing about having the cheap prices from the beginning ... It's confusing, and I don't want to even bother with them."
Based on Penney's quarterly earnings report this week, Pietschnig wasn't alone in her feelings.
New Pricing Strategy Turns Off Shoppers
Store traffic at J.C. Penney sank 10% last quarter, in part because shoppers didn't get the retailer's new pricing strategy, Johnson told investors and press this week during a meeting in New York City to review its earnings results.
Johnson also outlined the next phase of Penney's "seismic" reinvention strategy -- which sounded a lot like adding more upscale, hip products a la Target, but in a department store setting -- while conceding that the turnaround would be tougher than management had anticipated. But he also stressed that Penney's makeover is a work in progress, and the chain is on the right track.
Still, during the first quarter ended April 28, Penney posted a $55 million net loss. Sales fell 20.1%, to $3.15 billion from a year ago, while same-store sales dove 18.9%.
Penney's sales especially sank over the weekends, when heavy coupon users like Pietschnig hit the stores.
While shoppers were entertained by the retailer's new cheeky print and broadcast ad campaign, "it's not doing the work" of communicating the new strategy, Johnson said.
To that end, Penney is tweaking its ads to hammer away its value proposition -- 40% lower prices every day, monthly sales and clearance sales Thursday and Friday -- with ads that spell out the savings and feature copy like, "Do the math."
The retailer underestimated just how much consumers are addicted to coupons and sales events, which Penney executives kept referring to as "drugs" from which shoppers need to be weaned. "We've got to learn to drive traffic in new ways, the old way was with a coupon and a sale," Johnson said.
On the bright side, customer surveys showed that shoppers are warming up to Penney's changes, he said. "Customers love what they see when they come to the store."
Target-like Merchandise in a Department Store Setting?
Beyond the change in pricing, by this autumn, nearly half of Penney's merchandise will be different.
The chain, which announced plans in January to reorganize its store floors into 100 specialty shops -- including a massive Martha Stewart home store -- will also introduce exclusive, edgy fare to fix its struggling home furnishings business -- a clear sign that Johnson is using the lessons he learned during his tenure at Target.
The new lines will include:
- home products from Michael Graves, the architect whose housewares line at Target was the first of the discounter's now-famous trendy designer collections;
- a home line from Sir Terence Conran, the British retailer/restaurateur whose modernist, high-brow stores are iconic in the world of home design;
- a shop from Bodum, the contemporary Danish kitchenware company;
- and a shop from Jonathan Adler, a hipster designer known for his cheeky, vibrant home products.
In classic Target fashion, Graves, Conran and Adler are not totally household names, but each brings to the table both design cachet and a cool factor.
Elsewhere in the store, Penney's soon-to-arrive fashion and accessories lines reflect a high-end push. They include a girl's clothing line from designer Cynthia Rowley (another Target collaborator); a collection from designer Georgina Chapman of Marchesa, a high-end brand that's a regular on the runway and at red-carpet events; and watches from tony Tourneau.
"The goal here is to reach younger, newer shoppers," Penney's President Michael Francis told the audience.
But is this what shoppers want from a chain that has traditionally played to the sensibilities of Middle America? Analysts -- who were largely unfazed by Penney's first quarter declines -- seem to think so.
Although "their numbers were in the ditch ... I'm optimistic," Craig Johnson, president of retail consultancy Customer Growth Partners, told DailyFinance, saying the shop concepts are the right strategy.
Citi analyst Deborah Weinswig agreed. "We do not believe that J.C. Penney's disappointing first quarter results signify that the company's transformation is off track," she said, in a research note. Weinswig was bullish on the "significant product newness on the way," noting Penney's 28 brand introductions and relaunches.
"While the first quarter was more challenging than anticipated, management has already begun to tweak its marketing and pricing to improve traffic," she said.