EarningsCenter

This Retailer Just Flat Out Stinks

×

JCPenneyYou'll be hard-pressed to find an uglier quarterly report out of the retail sector than what J.C. Penney (JCP) delivered on Tuesday night.

Investors figured that new CEO Ron Johnson's "Fair and Square" pricing strategy wouldn't be a hit right away, but no one assumed that the recently remodeled department store chain would be this earnings season's biggest disaster.

It was.

  • Sales plunged 20%, dragged down by a shocking 18.9% drop in comparable store sales. In other words, the average store generated nearly 19% less in revenue than it did during last year's fiscal first quarter.
  • Analysts were already braced for a loss, but J.C. Penney's quarterly deficit of $0.25 a share was more than double the red ink that the pros were expecting.
  • J.C. Penney is suspending its quarterly dividend. That's a huge red flag, indicating that the chain is desperately trying to preserve its money.

All's Fair and Square in Love and Retail

J.C. Penney's stock opened sharply lower on Wednesday after the report, providing a grim contrast to the sharp rise in the shares last year when Johnson was tapped as the retailer's new helmsman back in November.

Johnson came from Apple (AAPL), where he headed up the tech giant's entry into retail. He grew the Apple Store concept into a 300-unit empire raking in $15 billion in annual revenue. Before that he was an executive in the 1990s at "cheap chic" leader Target (TGT).

Apple? Target? Investors went wild when J.C. Penney landed Johnson, and they cheered again when he introduced the "Fair and Square" makeover that would replace the chain's history of frequent sales and perpetual markdowns on aging inventory with everyday low pricing.

I didn't buy it, arguing when the new strategy was implemented in February that J.C. Penney will never be great again. Apparently, I'm not the only one that's not buying it.

The move to simplify J.C. Penney's pricing is either alienating core customers or -- ironically -- complicating things for shoppers. Store traffic fell 6% during the week and a more problematic 10% over the weekend.

Pair the store traffic metric with the nearly 19% slide in comps and you get the double whammy of fewer shoppers and the average shopper spending less at the store.

On the Clock

Believers will argue that Johnson is just getting started.

He has a multiyear plan in place. By the time he's done, J.C. Penney will look far different than the sleepy retailer that it was before he arrived, and hopefully a lot different than the sinkhole that it was this past quarter.

The next major phase of Johnson's plan will kick in later this year, as 80 to 100 brand-specific areas -- or stores within the store, if you will -- pop up in a "Main Street" setting that Johnson envisions for J.C. Penney.

However, with the company $3 billion in debt and now apparently in capital preservation mode after nixing its dividend, Johnson may not have the luxury of time to see his four-year plan through. His halo has come off, and even the $900 million in savings that he was projecting over the next two years is in doubt.

The number of skeptics is growing as the share price sinks.



A Penney for Your Thoughts

Nobody seemed to question Johnson's vision when he arrived, but the first quarter of the department store chain under the "Fair and Square" pricing and its new minimalist logo aren't paying off.

It's now fashionable to be cynical.


After all, how is someone supposed to find what they want in a sea of 80 to 100 mini areas? What's the point of promoting everyday low pricing when there will still be month-long promotions, extra markdowns on the first and third Friday of the month, and a scheme of colored price tags to figure out?

Johnson had it easy at Apple, with its premium products and selective retail distribution. Apparel is everywhere, and there's no cult of J.C. Penney shoppers that will jump on anything that the retailer puts out.

There's no such thing as an iBlouse. There will never be an iBlouse.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.


Increase your money and finance knowledge from home

Getting out of debt

Everyone hates debt. Get out of it.

View Course »

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

Add a Comment

*0 / 3000 Character Maximum

18 Comments

Filter by:
janetvw

I am appalled at how Wall Street is trashing JCP! The shopping experience is actually better than ever! I find I am spending way more than I used to at JCP. Instead of just reading reports, go to the store. Or better yet, ask your wife or girlfriend to check it out. (BTW, I don't own the stock.)

June 09 2012 at 1:56 PM Report abuse rate up rate down Reply
Twokaps

As an EX JCP customer CEO Johnson reminds me of the same idiot who changed the Coca Cola recipe.

June 07 2012 at 8:25 AM Report abuse rate up rate down Reply
patkin1

The customer service is gone. The pricing is not the only important thing. If a man wants to purchase a suit, there is no longer anyone to help him with a fitting, let along access to alterations. I don't want to go all over the store to find a service center filled with young personnel, who have no clue how to be helpful. All I see is attitude. If you don't like the way you are treated, they really don't care if you leave without a purchase. If you were at penneys for 20 years you were let go. These people were the backbone of the business. You deserve to fail.

June 06 2012 at 4:04 PM Report abuse rate up rate down Reply
Bob & LaVerne

We do not even look into J. C. Penny's adds any more. They have become so controversial in all of their ways of thinking these days, we do not even care what happens to them. We believe in true marriage of a man and woman who will bear children as God intended for them to do. If the gay people want to push their views on us--we will not tolorate their views. True marriage is between A Man and A Woman. They will have to invent their own way of staying together.

June 06 2012 at 12:19 PM Report abuse rate up rate down Reply
Princessa Mia

JCP treats their employees very poor. They fired long term employees a month ago, and they cut all possible hours for the rest of them. Now there is one person working at register, cleaning fitting rooms, and helping people on the floor. She does all that for minimum wage. The raise JCP gives to their employees is 5 cents a year, if they are lucky enough. I know this because I got used to work there.

June 04 2012 at 3:26 PM Report abuse rate up rate down Reply
loafer57

I hv always found and still do find clothes that I like and buy @ Penney's much moreso than I ever do @ Target, Macy's, Nordstrom and even TJMax, etc., etc. In fact I hven't found much of anything at some of these other stores for quite some time now. They also hv great linens, drapes, curtains, housewares, etc. Think one has to give this new strategy a little time and if it doesn't seem to work go back to weekly or some other kinds of sales strategy.

May 21 2012 at 8:53 AM Report abuse rate up rate down Reply
Mark Goldstein

No biiggie here. Only 2 months worth of sales were while the new program was in effect. You need more time for people to find out they are doing better with EDLP rather than Hi Low.

May 18 2012 at 11:56 AM Report abuse rate up rate down Reply
Bill

For a long time J.C. Penney's has managed to stave off the fate that has befallen Montgomery Wards, May, Sears, K-Mart, etc., but I think their days are numbered.

May 18 2012 at 11:52 AM Report abuse +1 rate up rate down Reply
Lauren Phelps

I didn't get the "fair and square" pricing model. They never really explained it. They should just say "we will charge a 10% markup and that's it" or whatever. That way they can have low end to high end and you know the price will be reasonable. I used to love their stores. I liked their plus-size selection and their homewares. Recently I went there for sheets. They had tons of sheets. They didn't have the ones I wanted in king size, but they could order it. Why would I want to order it when I can order it on Amazon and have it shipped to my door for free. Plus a few shirts I bought and never even wore lost buttons in the first wash. Quality and selection are going down so they can make room for large advertisements and an "open concept." I may sound like I'm old-fashioned, but I'm only 30. The young people of today do not necessarily want a competitor to an Apple store or Amazon. They need a place with organized and quality stuff at a reasonable price that they can try on and/or feel.

May 18 2012 at 10:27 AM Report abuse +1 rate up rate down Reply
rich1braw

I wrote this letter to Mr. Johnson in March:

March 10, 2012

Mr. Ron Johnson
CEO J.C. Penny Company
6501 Legacy Drive
Plano, TX 75024

Dear Mr. Johnson,

As a bond holder in J.C. Penny, I am writing you because I am concerned about the effectiveness of your “Fair and Square” pricing program.

I like your commercials, especially the one where Ellen DeGeneres plays Lucy, although I don’t think the younger generation will get it. I also don’t think in the long run shoppers will continue to respond to your “Fair and Square” pricing program.

Having been in the retail industry for twenty-five years, I know how deeply the word “Sale” is ingrained in the shopper’s psyche. I also know that a lot of “Sales” are phony, but that does not negate the lure of the word.

You certainly will initially draw in consumers with your new program to see what it’s all about just like a new store does when it has a grand opening. And they will buy things.

But as other stores continue to attract customer with the word “Sale” I do not believe the consumer will say to him or herself, “Let’s see what J.C. Penny’s ‘Fair and square’ price is on this item before I buy it on “Sale” at store X.”

I can understand your reasoning behind your “Fair and Square” pricing program. You were the driving force in the rise of Apple’s retail stores. Apple had a specialized product. If a consumer wanted an Apple product they had to pay the price the company established. You never had to use the word “Sale” and therefore were unfamiliar with that word’s effect on consumers’ purchasing choices. Apple’s only concern was to stay ahead in innovation.

In addition, because the Supreme Court reversed previous rulings that manufacturers could not set retail prices, Apple was able to demand other retailers they sold their products to maintained the same price within pennies of what the price was in the Apple stores. Apple products were never on “Sale”.

However, I do not believe you can effectively apply that same marketing technique to J.C. Penny. Most products J. C. Penny sells, whether store branded or manufacturer branded, can be found in other stores. Consumer’s first response when selecting a store to shop is to go for the one running the “Sale”. The reason for this is as I said above. The word “Sale” is too deeply imbedded in the brains of the consumer.

I hope you take this letter in the constructive manner in which it is sent. Wishing you all the best in your new job at J.C. Penny. From experience I know how difficult it is.

Very truly yours,


Richard Brawer

May 18 2012 at 9:22 AM Report abuse +1 rate up rate down Reply