7 Reasons Why JC Penney's Q2 Earnings Were Another Huge Disaster

By Ira Kalb, Marshall School of Business, USC

JC Penney (JCP) has just reported even worse results for their second quarter than they had during their first quarter under new CEO Ron Johnson.

The first quarter results represented the company's worst performance in four decades. The second quarter results just reported had losses of $147 million (or 67¢ per share), revenue was down nearly 23%, same store revenue for stores open at least a year fell 21.7%, and customers dropped by 12%.

While analysts expected the loss, excluding one-time items, to be 26¢ a share, it was actually 37¢ per share.

%Poll-77086%1. The marketing strategy is still off-way off.

As I said in my previous post in May, after JCP's first quarter loses, the entire marketing mix seems to be off. One would hope that the company would learn from its mistakes. From the results just reported as well as Mr. Johnson's comments to the financial markets and the media, it appears that not much learning is going on. Per the Los Angeles Times, to calm the financial markets, he said, "I am completely convinced that our transformation is on track." What has him convinced? To convince the rest of us, he should provide the data so we can feel as comfortable as he does. As Cuba Gooding Jr. said in the movie Jerry Maguire, "Show me the money."

2. Inside-out thinking rarely works.

From the start, it appeared to be a strategy that came out of the mind of Mr. Johnson rather than JCP's customer base. Successful companies think outside-in rather than inside-out. They focus on the needs and desires of customers. They don't assume that they understand those needs and wants better than customers do. When he says, "I am convinced" without providing any reasons, it just confirms that he is still operating inside his own head. If his marketing mix of strategies doesn't fit the needs of his target audience, they are unlikely to work.

3. Pricing.

The problem with "everyday low prices" is that it is not a unique positioning strategy. Wal-Mart used always low prices as a slogan for 19 years. The concept of "everyday low prices" doesn't seem to "square" with the positioning of in-store boutiques. Usually boutique prices are higher. Most importantly, "everyday low prices" is a weaker strategy than giving customers "deals." The reason is that "everyday low prices" only uses the price building block. It establishes the products at a lower value or position in the minds of buyers. By giving shoppers discounts and coupons, the products are established at a higher value (from the list price), and the discount or coupon (both examples of sales promotion) allows customers to save money off of that higher established value. Hence they feel good about getting a deal.

4. Coupons.

Coupons have another important advantage for companies. Only an average of about 2.5% of coupons in the U.S. are ever redeemed. Therefore the company receives the promotional value of the coupon (each coupon is a mini ad for the product) while only having to discount the face value of the coupon to the small percentage that redeem them. Moreover if the coupon comes from the manufacturer of the product, rather than the retailer, retailers such as JCP will receive reimbursement for the coupons that are redeemed at their stores from manufacturers. Therefore retailer gross margins are preserved.

5. Discounts or sales.

Discounts and limited time "Sales" also have other important advantages for companies over "everyday low prices." Once the discount or sale period is over, the company can raise the prices back up and make more money. Furthermore, as with coupons that have expiration dates, special deals or limited-time discounts encourage shoppers to come into the store to buy before the "Sale" or discount period is over. With "everyday low prices," the retailer does not benefit from any sense of urgency in the minds of shoppers. Shoppers think, "Since I can go to the store whenever I want, what's my incentive to go there now?" Meanwhile, many of those that would have come to the JCP store to take advantage of the discounts before they expire are lured by discounts and special deals offered by competitors. Hence, JCP loses out altogether.

6. Promotion

The confusing screaming ads that annoyed so many people (click here for an example) are gone, but they have been replaced by new TV commercials that may be entertaining as mini movies, but they don't give customers good reasons to shop at JCP. Here is just one example of a commercial the Company ran in June. In August, they have been running a free haircut for kids commercial. Free haircuts are a clear short-term benefit to parents that may boost traffic in the short run, but they are unlikely to have any lasting benefit to JCP. Moreover, this offer is fraught with problems related to people having to wait in line, being unhappy with the haircut (those that get "things" for free are often the most demanding and easily disappointed), and the costs to JCP without any clear benefit to the bottom line.

7. Still not listening to customers.

The worst mistake of all, which is related to all the others, is that Ron Johnson is still not listening to the JCP loyal customer base. He approached his new position of CEO from an inside-out perspective. To help insure success, you have to talk with customers, run your ideas by them, and get ideas from them. In short, companies need to listen to their most loyal supporters and the prospects that they hope to attract. From the strategies chosen and the disappointing first- and second-quarter results, this apparently has not happened at JCP.

What's next?

Let's hope that the third and fourth quarters are better for JCP. If they are, the results may be related to seasonal issues, such as "back-to-school" and year-end "holiday" shopping because the marketing strategies so far leave seasoned marketers scratching their heads. JCP financial results to date only confirm their concerns.