J.C. Penney Blames Ron Johnson's 'Failed' Strategy for Struggles

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J.C. Penney is out today with another quarter of brutal sales figures, and it rather explicitly says that former CEO Ron Johnson is to blame.

For the sixth consecutive quarter, the company reported a loss. Penney said it lost $586 million, or $2.66 a share, for the three months ended Aug. 3, compared to a loss of $147 million, or 67 cents a share a year earlier.

Revenue came in at $2.66 billion, down from $3.02 billion in the same quarter last year. Same-store sales, meanwhile, were down 11.9 percent year-over-year. It missed earnings estimates with a loss of $2.66 per share. Analysts were expecting a loss of $1.07 a share on revenue of $2.77 billion.

Those are ugly numbers, but par for the course for J.C. Penney (JCP), whose struggles over the last two years have been well-documented. While growth had stagnated even before the arrival of Johnson, there's no doubt that the company's free-fall was largely owing to Johnson's extreme makeover of the century-old retail chain.

And the company did not hesitate to blame its ongoing problems on the former Apple (AAPL) executive, who left J.C. Penney four months ago.
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Right off the bat, the earnings report says that its same-store sales were "negatively impacted by the company's failed prior merchandising and promotional strategies, which resulted in unusually high markdowns and clearance levels in the second quarter." It also points to "the lengthy renovation and disappointing re-merchandising" of its home department, another of Johnson's pet projects.

In an earnings call, new CEO Mike Ullman said that the company was working to get back to prior stock levels of its St. John's Bay house brand. That, too, was a reference to the prior regime's missteps: Johnson had done away with that brand, alienating much of the retailer's customer base. Ullman also alluded to "the errors of the past" and added that "we have work to do to rebuild customer trust and loyalty that was impacted by the mistakes of the past."

The finger-pointing is far from unjustified, and there's no doubt that the new regime has its hands full cleaning up prior management's messes. And from a financial perspective, it's fair to point out that sales figures are impacted by its need to compensate through heavy discounting.

Still, the blame game here feels unnecessary. This is, after all, a company that spent the last two weeks in the news for its ugly boardroom infighting with activist investor Bill Ackman. For Ullman to repeatedly harp on his predecessor's failures isn't going to change anyone's impression that the company's management is dysfunctional.

It's not all bad news for J.C. Penney. Despite the earnings miss, shares opened 8 percent higher Tuesday morning -- but gave back most of those gains -- largely owing to some positive trends: The company touted a 470-basis-point uptick in same-store sales over the first quarter of the year, and it also notes that it's seen strong sales during the back-to-school season. Perhaps we are indeed seeing the beginnings of a recovery for the struggling retailer -- or perhaps it simply speaks to the low expectations that it's set for itself over the last two years.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.

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J.C. Penney Blames Ron Johnson's 'Failed' Strategy for Struggles

It was repeated so often that it became dogma: Ron Johnson's greatest sin was ditching the sales and coupons. Johnson himself called it a "mistake," and one of his last acts as CEO was to abandon his pricing strategy and bring back the coupons.

While many commenters cheered the coupon comeback, a few were more skeptical of the return to the old regime. In fact, many noted that the retailer was obviously just jacking up prices just so they could lower them again with discounts.

Obviously J.C. Penney needs to bring back the sales and coupons if it wants to attract its wayward customers, but it should probably find a more subtle way to do it. Johnson was criticized for abruptly abolishing coupons without first testing the strategy; if the new management just slaps on higher price tags and then hands out coupons, it risks making the same error in the opposite direction.

One commenter identified herself as a sales associate for J.C. Penney, and said she hated the "dog and pony show" of the old coupon regime. Her comment got more than 300 'likes,' as well as comments from other sales associates who expressed how difficult it was to deal with price adjustments, extreme couponers and confusing sales.

"As an associate, I had Nightmares in Nov & Dec of 2011 when the coupons were out in Groves [sic]," said another commenter, who went on to suggest that the retailer should place limits on how many coupons shoppers can use.

The lesson for management? If you're going to bring back coupons, don't make a complete return to the "death by coupon" era -- it can be a huge pain for your employees.
In overhauling the retailer's apparel offerings, Johnson evidently wanted to transform its customer base into something more closely resembling Abercrombie's young and skinny crowd. Unfortunately, that meant that J.C. Penney's larger customers were left out in the cold.

Various commenters complained that plus-size offerings have dwindled significantly, and that they'd like to see all styles of clothing available in larger sizes. If the new management (which is mainly the old management) wants to win back customers, it will need to make sure customers of all sizes are accommodated.
Several commenters said that they missed being able to shop and order through a catalog.

Sure, most people who can't make it into the store will be inclined to shop online, which is more cost-effective for retailers than shipping out heavy catalogs and taking orders by phone. But members of J.C. Penney's older customer base may not be as technologically inclined, so it's likely missing out on sales by not providing it as an option.

The retailer has already made concession to its older shoppers by bringing back St. John's Bay and other "basic" clothing. Making it easier for them to shop from home would also be a good move.
One innovation that Johnson brought over from the Apple Store was the mobile checkout: Instead of waiting in line, customers could get checked out by a roving cashier toting a smartphone or tablet.
But much like the pricing strategy, mobile checkouts apparently don't play as well in a big department store as they do in the Apple Store (AAPL). We've heard from J.C. Penney employees complaining about the switch, and it looks like customers aren't thrilled either; a few commenters noted, for instance, that the process makes getting a receipt a hassle.

Maybe the system has been implemented poorly, or maybe it's just a case of an older customer base being confounded by innovation. Either way, this looks to be another change that J.C. Penney should scale back or reconsider.
Ron Johnson had a vision of a department store as a marketplace -- instead of just organizing clothes by department, he would have a collection of boutiques, each dedicated to one brand.

But the stores-within-a-store concept might be confusing some customers. One commenter pointed out that the layout makes comparison shopping difficult, forcing customers to visit multiple boutiques just to find a pair of jeans. Other commenters echoed that complaint, noting that they found the layout so frustrating that they left the store empty-handed.

The retailer has burned through a whole lot of cash remaking its stores, so we imagine management isn't thrilled at the prospect of undoing those changes. But if they want to get sales figures back up, they'll need to arrange their stores in a way that makes comparison shopping among its brands easier.
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