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Penney's Sales Keep Sliding as Customers Shun New Pricing Plan

JC PenneyBy ANNE D'INNOCENZIO

NEW YORK -- Six months after J.C. Penney Co. launched a bold new pricing plan, customers still aren't buying it.

The midprice department store chain reported a bigger-than-expected loss and plummeting sales during the second quarter, as its customers remain confused by the new pricing strategy that ditched hundreds of sales in favor of everyday lower prices. The bleak performance marks the second straight quarter of steep sales declines since the plan was introduced Feb. 1.

The company also withdrew its profit guidance for the year. Its shares tumbled more than 8 percent in premarket trading, but turned positive, rising as much as 9 percent in early trading. Investors appeared to be encouraged by CEO Ron Johnson's soothing words during a 90-minute session that he's seeing some hopeful signs in the business since early August.

Johnson noted that customer counts have improved and that changes it made to the new pricing plan Aug. 1 are starting to resonate with shoppers.

Nevertheless, Penney's poor results, released Friday, underscore how difficult it is for a company to change the way shoppers behave. In a still-struggling economy, shoppers are still looking for racks of "70 percent off" sales signs and coupons. The latest financial performance also tests the patience of investors and adds more pressure on Johnson, a former Apple executive, to turn things around at the retailer.

Under Johnson, Penney is transforming everything from the items it stocks to store design. But the riskiest move has been its pricing, which is turning out to be an even tougher sale to shoppers than previously expected.

Johnson, dressed in navy blue blazer, white oxford shirt and jeans, promised to stay the course, and remained relaxed and confident during his talk with analysts broadcast over the Web.

"I am completely confident that our transformation is on track," said Johnson. "The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course."

He told analysts that he wants to create a new breed of department stores - the specialty department store, which will be carved up with different branded shops to replace the sea of clothing racks typical of the industry and an area in the middle of the store that will offer shoppers services.

Penney's path to reinvention has been rocky.

In May, the company's stock plunged 20 percent, its biggest one-day decline in four decades, after the retailer posted a larger-than expected first-quarter loss and a 20.1 percent drop in revenue because of the poor reception from shoppers.

Things got even worse in the second quarter as Penney scrambled to backpedal and withdrew TV advertising and canceled some print campaigns late in the period as it figured out its new game plan.

The department store, based in Plano, Texas, said Friday that it lost $147 million, or 67 cents per share, in the quarter ended July 28. That compares with net income of $14 million, or 7 cents per share, a year ago.

Revenue tumbled almost 23 percent to $3.02 billion. Revenue at stores open at least a year fell 21.7 percent, worse than the 18.9 percent drop the quarter before.

Excluding one-time items, Penney's loss was 37 cents per share. Analysts had expected a 26-cent loss on revenue of $3.2 billion.

The company said that its gross profit margins fell to 33.2 percent in the quarter, down from 38.3 percent a year ago.

Johnson described the balance sheet as "rock solid." The company said it ended the quarter with about $888 million in cash and cash equivalents.

Shares rose $1.27, or almost 6 percent to $23.36 in morning trading.

The stock is down about 50 percent since investors, initially enthusiastic, bid them up to about $43 after Johnson announced the pricing plan in January.


Penney on Feb. 1 began using three-tier pricing with consistently lower daily prices that were 40 percent below last year, deeper monthlong sales on specific items and periodic discounts that are even more generous throughout the year. But Aug. 1, Penney eliminated the monthly sales events and increased the frequency of the periodic sales to every Friday. These had been called "Best Price" sales but are now being called "clearance."

Penney is keeping "Every Day" low prices, which has accounted for about 70 percent of sales since the company began the new strategy.

Johnson had said the new approach should make pricing easier for customers to understand.

"We thought, 'Why are we trying to teach customers new language to shop?" Johnson said in a recent interview with The Associated Press. "We're just trying to be straightforward."

Penney is tweaking its advertising to better explain the change. That includes inserts in newspapers every Friday during the back-to-school season highlighting specific products like jeans. TV ads tout free children's haircuts at stores to draw shoppers.

The new ads are in stark contrast to the spots that introduced the new pricing plan. The "fair and square" brand campaign featured commercials with dogs, kids and bright colors - but little explanation of prices.

Some analysts hope Penney will attract more shoppers once it makes the stores more inviting. Starting this fall, almost half its merchandise will be new. It plans to some brands and redesigning others. Among the new brands shoppers will see are Vivienne Tam and Betsey Johnson, who will be selling affordable versions to Penney.

Penney just launched shops for Levi's and its own jeans brand Arizona. Johnson said the Levi's shop has seen a 25 percent increase in revenue compared with last year. It plans 100 shops within each of its stores by 2015 that will either focus on one brand or a variety of labels. The company also plans to add areas in its stores called Town Squares to offer services and advice.

Even that plan has had its hiccups. Last month, Macy's won a preliminary court ruling against Martha Stewart Living that would prevent it from selling some of its products like cookware and kitchen utensils at J.C. Penney. Penney has been counting on the popularity of the Martha Stewart brand to revitalize its business.

Penney said Friday that it no longer expects to meet its earnings guidance for 2012. It had expected a profit of $2.16 per share. Analysts expected the company to earn $1.26 per share for the year.


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319 Comments

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jdy277

I've been very disappointed in the "new" Penney's...I spent a great deal of money at Penney's over the last several years but after Mr. Johnson took over, I very rarely enter the store at all. I did go in the other day in search of some tops but left empty handed...the stores are virtually empty of customers and I miss some of the employees I got to know over the years...the customer service desk is closed and everything is done at the registers. If something isn't done soon, I see JC Penney's going down the drain!

September 08 2012 at 8:35 PM Report abuse rate up rate down Reply
lamby

It would appear that Mr. Johnson the "Guru" of Apple is not such a "Guru" at JCP! Its time to retire Mr. Johnson, they will probably give you millions for your shoddy performance anyway!!

September 08 2012 at 6:34 PM Report abuse rate up rate down Reply
Chris

As a OPENLY Gay JC Penny employee, I'm so glad that I don't have to deal with Morons and A@@H***S who don't know how to treat people! This company is still a GREAT Company to WORK and SHOP for. The IDIOTS that don't want to shop here because of the Lifestyle GOD chose for me, STAY OUT. Without all you people here that means where getting what we want customers who care and aren't rude and know how to smile instead of the uptight jerks that did come in.

September 04 2012 at 11:10 AM Report abuse -1 rate up rate down Reply
papadb24

Mr Johnson please leave quickly, it is the only hope for the customers and Employee's that are left!

August 14 2012 at 11:12 AM Report abuse +2 rate up rate down Reply
redoak58

I will never shop at JC Penney's again. When their ads showcase perverse homosexual lifestyles then I will take my money and move on. I won't even look at their ads in Sunday's paper. Good luck with that strategy
.

August 13 2012 at 9:00 AM Report abuse +2 rate up rate down Reply
Tammie

Just a couple personal observations:
1. If you haven't been to the "new" Penney's, you haven't really given it a fair shot. I have, and I think there is still great variety and a wide range of choices. (For example: See comment from Enter Kay's AOL)
2. I think a lot of the hubbub is fired up by the negative news reports. The more negative stuff people hear-the less people even are willing to check it out--profits drop - then there's more negative reports -- and the cycle spirals downward.
3. "Kay's" (mentioned above) commented on their advertising. While I agree to a point with the limited options shown in the "flyer" we get, I also considered other flyers from other stores received in the Sunday paper. IMHO, other stores really don't advertise substantially more options that Penney's; yet people don't assume these are their limited options. In addition, by doing their (Penney's) ads with a few less options, it would seem to me it would reduce (to a degree) advertising costs, allowing them to be able to charge less for products sold.
4. To those who commented negatively about the Penney's stores they have shopped in, all stores face the same issue. There are pleasant & helpful employees versus rude & less-than-helpful employees. I have had positive and negative experiences at Sears, Dillard's, Target, etc. The change in Penney's approach has nothing(or perhaps should say "less" because often individual store management can affect attitudes of employees) to do with the employees attitudes and abililites.
5. "Gay" spokes person comments -- While I do not agree with the "lifestyle", I don't think dealing with individuals who choose this lifestyle can be avoided. Treat all people with respect and good manners. Being unkind and cruel isn't going to change anything.
And as I always say, "Opinions are like noses; everyon has one and they all smell."

August 13 2012 at 8:57 AM Report abuse -1 rate up rate down Reply
Matt Dougherty

The vip's better wake up and FAST !!!! We realy don't need you ! Hope you all get laid off ! And NO unemployment ! When you have a gay spokes person you gotta know you're in trouble !

August 13 2012 at 8:13 AM Report abuse +2 rate up rate down Reply
1 reply to Matt Dougherty's comment
American 1st

Matt -
They didn't learn a thing from Chick-Fil-A, did they? CFA had their biggest sales EVER after Mr. Cathy stood up for traditional marriage between a man & a woman. Some other companies & TV shows need to take the hint, too.

August 13 2012 at 2:36 PM Report abuse +1 rate up rate down Reply
Enter Kay's AOL.

I think at least part of Penney's problem is the change they made to ther advertising. Instead of showing a decent variety of merchandise, they run large photos of just a few items. If you don't particularly like that item, then you're done with the flyer. There's nothing else to pique your interest. The ads remind me of Old Navy or The Gap. Why are they imitating what I would consider a lesser brand? I always liked Penney's, but I haven't been there since the change - it'll be too bad if they go under. Too many corporate leaders buy into change for the sake of change, whether it's for the better or not.

August 13 2012 at 8:09 AM Report abuse +2 rate up rate down Reply
Matt Dougherty

Ellen De Generate A Spokes person, Number ONE start of a failure ! Also bring back the sales people who knew something ! Also get rid of the asshloles who are out of touch with the consumers ! If it worked all these years to get where we are today, Don't fix it ! STUPID VIP"S Bring back the sales people who have brought Penneys to the top NOW!

August 13 2012 at 8:09 AM Report abuse +2 rate up rate down Reply
1 reply to Matt Dougherty's comment
American 1st

Matt - I would like to add: Get rid of De Generate!

August 13 2012 at 2:39 PM Report abuse +1 rate up rate down Reply
blackburndh

It's no wonder JC Penney's is going under. Their pricing techinique requires the consumer to check each item on the sales rack for the bargain. Yesterday, each rack was a $5 and Up, $8 and up, $12 and Up and on and on. What's up with this. I personally thought their merchandise was cheap, but their prices too high!

August 13 2012 at 7:08 AM Report abuse +2 rate up rate down Reply