Will J.C. Penney's Massive Re-Makeover Win Us Back?

Retail Sales
Mary Altaffer/AP
J.C. Penney is challenged. Against a backdrop of suburban shopping mall decline, the retailer has to attract a new generation while earning forgiveness from the long-time customers it spurned in its last makeover, stay liquid and fight the clicks-vs.-bricks battle.

Giving Customers What They Want

With three CEOs in almost as many years (CEO Myron Ullman returned after the disastrous tenure of Apple and Target alum Ron Johnson), the chain's strategy has returned to pre-Johnson discount pricing, coupons and private label brands like St. John's Bay, which its core customers had sorely missed. To be fair to Johnson, he did spiff up the previously dowdy and cluttered stores. Unlike Walmart (WMT) and Sears Holdings' (SHLD) Sears and Kmart, J.C. Penney isn't inspiring photo-driven articles documenting its disarray.

Other changes announced by Ullman are the return of their home goods collection starting in April, the addition of 46 more in-store Sephora beauty shops (a big draw for younger women), and the closure of 33 underperforming stores.

A fourth quarter 2013 earnings call in late February -- which Ullman characterized as an update on the store's turnaround -- showed a 2 percent rise in same store sales. Other positive commentary on the call prompted Citigroup (C) analyst Oliver Chen to upgrade to buy with an $11 price target.

J.C. Penney has to contend with more successful (and fashion-forward) rival Macy's (M), which lured away many of its core shoppers and has more traction with younger. Macy's has been performing well thanks to CEO Terry Lundgren's localizing strategies. Localizing sends merchandise to the stores whose customers actually buy it -- parkas to Minnesota and swimsuits to Miami. In that call, Ullman announced more localizing at J.C. Penney.

Clicks, Not Bricks

Shoppers are warming to J.C. Penney's online arm: Its sales rose 26.3 percent this last quarter year over year and contributed $381 million to sales. Ullman said the company is focused on "seamless customer experiences between J.C. Penney stores and jcp.com." Ordering on your phone or laptop and in-store pickup is part of the reason Ullman said gross margins should significantly improve in 2014. That's why the company reconfigured the interfaces and made several key hires.

%VIRTUAL-article-sponsoredlinks%Just six months ago analysts worried whether the chain could make it through one more year. This recent quarter's results have turned rating agencies cautiously optimistic. Standard & Poor's raised its rating from negative to stable. "With liquidity concerns on the back burner (for now), the focus has returned to fundamentals, which for the moment appear to be improving, albeit modestly," said Sterne Agee analyst Charles Grom, who maintains a neutral on J.C. Penney stock.

J.C. Penney has a long way to dig itself out of the hole deepened during Johnson's reign. It has to make itself relevant again in an Amazon (AMZN) world. And Macy's is a tough competitor, more so now that both will compete in home goods again. Macy's also has had a better read on fashion.

Likely J.C. Penney won't be the destination shopping experience Johnson envisioned nor "the leader in American retail" Ullman is prophesying, but it looks like it's staying around.

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Will J.C. Penney's Massive Re-Makeover Win Us Back?

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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