Will In-Store Mini-Shops Revive J.C. Penney? Analysts Say Yes

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JCPenneyPut aside, for now, the heated debate over whether or not J.C. Penney's (JCP) radical "fair and square" pricing strategy, which eliminated most sales, will do irrevocable harm to the chain.

CEO Ron Johnson's other radical change -- transforming the 110-year-old department store from a sea of clothing racks into an emporium of 100 branded shops -- just might be its saving grace. At least that's what many in the analyst community seem to believe.

Whether consumers -- the critics who ultimately count the most -- will end up liking the new format and resume shopping at Penney's stores is another story.

This week, Johnson, the former head of Apple retail, offered 300 analysts a sneak peak of his new vision for the chain as the nation's first specialty department store during a tour of a prototype store in the Valley View mall in Dallas.

The centerpiece of the concept is exclusive in-store shops: They include a boutique from fast-fashion retailer Joe Fresh; an Apple-esque Levi's shop featuring a denim bar staffed with jeans experts; and an upcoming home store from domestic doyenne Martha Stewart.

Shannon Faulk, Getty Images

Johnson plans to erect 100 shops inside each Penney store by 2015.

So far, performance at the 12 shops that have been rolled out to nearly 700 stores are generating comp-store sales 20% above the rest of the store, he told analysts.

It's important to note, however, that J.C. Penney's comp-store sales have been abysmal, sinking 28% in the recent quarter ended July 28, because the move to eliminate most sales and coupon events alienated so many shoppers.

Shannon Faulk, Getty Images Revival a Reality?

But despite shopper defections and plummeting sales, retail analysts from Citi, Nomura Securities and Morningstar said Johnson's new store concept will offer shoppers a long overdue, modern department store befitting 21st century living, and ultimately revive the now-struggling chain -- just not for awhile.

Beyond the shops, analysts were also upbeat on the "Street" concept: aisles that have been widened by five feet to spotlight a variety of features, activities and distractions. These include islands of iPads for grown ups to play with, LEGO tables for kids to play with, as well as food, such as a Caribou coffee bar, a Paciugo Gelato shop and a Sugar Shack candy store.

"We're fired up following a sneak peek of the new JCP prototype store," said Deborah Weinswig, an analyst with Citi, in a research note. "JCP is clearly not out of ammo, as it showcased a dazzling display of technology, outgunning the competition. We believe that the new JCP will offer a shopping experience unlike any other in apparel retailing."

The addition of high-profile shops such as the one from Levi's and international brands like Canada's Joe Fresh is wooing more brands to the store, a potential win for shoppers, she said. "Since Levi's rolled out, Haggar, Docker's and Disney have signed on!"

JCPenney

"Overall, we liked what we saw presented in the 17 shop-in-shops of the mock-up/prototype store," Echoed Paul Lejuez, an analyst with Nomura Equity Research. "We want to believe this can work, and longer term, we think it will."

The food/beverage offerings alone sets J.C. Penney apart from other department stores "and the retail landscape in general," he said. What's more, "visually, the shops look great."

Penney's does has some kinks to work out.

For one, "We are not sure how comfortable customers will be using the self checkout" kiosks, which don't accept credit cards. Instead, shoppers have to set up a store account and have it pre-linked to a credit card, which could be "a slight deterrent," he said.

JCP

Paul Swinand, an analyst with Morningstar, was also "bullish" on the makeover, saying it should bring in what Penney sorely needs: A fresh infusion of younger, cooler shoppers.

"We believe the shop-in-store concept is well suited to today's mall and consumer economic environments," he said, in a research note, adding that Penney's makeover is poised to payoff in the long run.

But it will be a slog.

Given that comp-store sales fell 20% in the most recent quarter, a 20% sales gain for the shops in the third quarter "is actually a deceleration," Swinand said, in the research note.

To that end, the retailer is looking to draw younger consumers who might consider Penney a dated, dowdy brand.

Although older, Middle American shoppers have long been the chain's bread and butter, Penney's makeover doesn't really target them. Johnson himself said the redesigned stores don't target "old ladies," Swinand noted.



Still, younger customers "currently don't have a great image of J.C. Penney in their minds, since they've only experienced the 'old' brand," Swinand said. "That's going to take time to change."

But even if Penney wins over younger shoppers with fast-fashion shops, gelato bars and iPad stations, does that also mean alienating its core, middle-of-the-road customer base? If so, where does that leave the chain?

Stay tuned.

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