Best Buy Is No J.C. Penney

If you do a Google search for Best Buy and J.C. Penney , you'll find lots of commentary suggesting that the two are very similar. Both retailers have struggled to keep shoppers coming in for the past several years. Moreover, Best Buy's recent move to add small branded shops for Samsung and Microsoft products looks similar to former J.C. Penney CEO Ron Johnson's plan to divide his stores into collections of about 100 shops.

As my colleague Rick Munarriz wrote last month, "Ron Johnson's flawed experiment to turn J.C. Penney around by opening branded mini-stores in the department-store chain is alive and well at Best Buy... The market eventually soured on Johnson's vision when it failed to generate sales growth at J.C. Penney. A similar fate may also await Best Buy."

Best Buy is opening small Samsung and Microsoft shops in its stores (photo courtesy of Best Buy).

Yet this J.C. Penney-Best Buy comparison overlooks one very important point: Johnson's plan to open small branded "shops" within J.C. Penney stores was not a primary cause of that company's dreadful 2012 performance. In fact, J.C. Penney's branded shops are probably its best assets as it looks to regain its footing. The lessons for Best Buy are thus much different. Adding a few brand-oriented stores-within-a-store is more likely to help than hurt.

Shops: a bright spot at J.C. Penney?
Ron Johnson's plan to split up most J.C. Penney stores into collections of 100 brand-oriented shops was one of the most visible aspects of his strategic plan for the company. As a result, it's natural for investors to associate the shops with J.C. Penney's meltdown during Johnson's 17-month tenure.

However, Mike Ullman -- who returned to the J.C. Penney CEO post a few months ago -- has been very supportive of the branded shops. Indeed, J.C. Penney first started adding these shops during his previous stint as CEO. The four shop concepts that predated Johnson were Sephora, Call it Spring by Aldo, MNG by Mango, and Modern Bride.

During J.C. Penney's Q1 earnings call, Ullman reminded investors that it took some time for customers to accept the shops, which offered a different type of merchandise than was typical at J.C. Penney. However, customers quickly caught on, and the Sephora shops are the most successful part of J.C. Penney today.

Ullman's commentary fits well with my observations during a set of J.C. Penney store visits back in March. In the J.C. Penney stores I visited, the "core" tended to be pretty desolate, and the newer shop concepts like Joe Fresh did not see much traffic, either. By contrast, the Sephora and Call it Spring shops were consistently the busiest parts of the stores.

What went wrong?
It is thus wrong to blame J.C. Penney's poor performance on the "shops." It is true that the introduction of more branded shops may have hurt J.C. Penney's performance indirectly. For example, it led the company to remove or scale back on popular private label brands like St. Johns Bay and Worthington, and the transformation entailed disruptive construction projects within most major J.C. Penney stores.

However, the main reason J.C. Penney experienced a 25% sales decline in just one year was the company's elimination of most coupons and discounts. This new pricing strategy alienated a large portion of its customer base, and management was slow to recognize the need to reintroduce coupons and frequent promotions.

So what?
What does this all mean for Best Buy? In short, the analogy to J.C. Penney is not very helpful. The main causes of J.C. Penney's massive drop-off in sales last year had nothing to do with the store-within-a-store concept. In fact, some of the best-performing areas within J.C. Penney stores have been these "shops"; it's the rest of the store that has been causing trouble.

That said, Best Buy has its own problems. Revenue has been stagnant since the Great Recession, while EPS is on the decline due to falling gross margin and rising store expenses. As I noted earlier this month, it's hard to justify Best Buy stock's massive 2013 run-up. But it would be wrong to see the introduction of Samsung and Microsoft shops as some kind of death knell for Best Buy. Who knows? The new shops could be Best Buy's last, best chance to become relevant again.

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The article Best Buy Is No J.C. Penney originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Google. It owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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