J.C. Penney Disappoints Again

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Plano, Texas-based retailer, J.C. Penney Company (NYSE: JCP) has reported yet another dismal quarter, putting the future of the company’s turnaround strategy announced earlier this year in doubt.

Q3 Results Miss Estimates

JCP’s third-quarter results missed Street estimates by a wide margin. For the fiscal third quarter ended October 27, the retailer reported a net loss of $123 million, or $0.56 per share. Excluding one-time items, JCP’s net loss for the quarter was $203 million, or $0.93 per share, significantly higher than the $0.07 per share loss analysts were expecting.

JCP’s total sales for the third quarter fell 26.6% to $2.93 billion, falling well short of consensus forecast of $3.27 billion. Comparable store sales for the quarter dropped 26.1%, while Internet sales tumbled 37.3%.

It is important to note that JCP's competitors have done much, much better. Comparable store sales at JCP’s competitors, Kohl’s Corp. (NYSE: KSS) and Macy’s Inc. (NYSE: M) rose 1.1% and 3.7%, respectively, in the third quarter. Macy’s online sales rose 40.4% in the third quarter. While a volume comparison will probably yield another sort of picture altogether, percentage-wise, at least, stellar competitor performance tells me that something is deeply wrong with JCP. Macy's is the largest outfit here, with a market cap of $15 billion against Kohl's $13 billion and JCP's only $3 billion. Macy's also has the largest number of employees, and beats the other two by a large revenue margin. Revenue (ttm) for Macy's stood at $27.06 billion, while for KSS and JCP it was $18.96 billion and $14.53 billion, respectively. The one-year chart below from Google Finance tells the story vividly.


However, CEO Ron Johnson, who implemented the new strategy earlier this year, sounded optimistic whe he said,” While the quarter overall was challenging, the performance of JCP's new brands and shops reinforces our conviction to transform J.C. Penney into a specialty department store.  Today, JCP is really a tale of two companies.  By far the largest part of our store is the old J.C. Penney, which continues to struggle and experience significant challenges as evidenced by our third quarter results.  However, the new JCP, centered around the shop concept, is gaining traction with customers every day and is surpassing our own expectations in terms of sales productivity which continues to give us confidence in our long term business model.”

While Johnson’s comments suggest that the new strategy is starting to work for the company, the third-quarter numbers definitely indicate that the strategy has failed so far.

Johnson’s Strategy

Johnson was appointed as J.C. Penney CEO back in June, 2011. He previously served as Vice President of retail at Apple (AAPL). Johnson’s appointment created excitement among investors initially, with JCP shares rising sharply following the announcement in June.

Johnson took charge of JCP in November 2011 and unveiled his transformation plans for the company in January this year. Since then, everything has been downhill for the company. The company has reported three straight quarterly losses (including the third quarter). JCP shares have fallen nearly 43% this year. And there is very little, if any, sign of the strategy working.

Johnson’s transformation plan included a new pricing strategy, which was termed Fair and Square. Under the plan, JCP has done away with most coupons and sales events and introduced everyday low pricing. The plan also includes transformation of around 700 of its 1,100 stores into a collection of 100 small shops. The move is expected to improve customer shopping experience. However, by introducing the new pricing strategy, JCP has in fact alienated many of its customers, resulting in dismal comparable sales.

According to Brian Sozzi, Chief Equities analyst at NBG Production, if JCP’s comp and margin run rates continue, the company may have to raise capital or consider removing itself from the public markets.

What Went Wrong With the Plan?

Johnson has pointed out that the new JCP, centered on the shop concept is working. While Johnson’s idea of transforming JCP stores into a collection of small shops to improve the shopping experience is probably right and showing results, the company needs to generate enough cash to continue with this transformation. That cash has to come from the old J.C. Penney, which is largest part of the JCP store. However, Johnson said that the old J.C. Penney continues to struggle. The reason for the old J.C. Penney’s struggle is the new pricing strategy. The new pricing strategy has alienated many of JCP’s customers. So, while the new JCP offers an improved customer shopping experience, the company’s customer base has dwindled due to the elimination of coupons and sales events.

Backtracking

As JCP shares have plummeted in recent months and the company has posted significant losses, Johnson has been forced to rethink his strategy. Last month, JCP offered a $10 gift coupon. The company also held 30% off clearance promotions. The company is also offering Free Family Photos in November. All these developments make it quite clear that Johnson has had to backtrack on his strategy to lure back customers. However, expectations ahead of the Holiday Season are quite low.

Dismal Online Sales

J.C. Penney also reported dismal online sales for the third quarter. NBG Productions’ Sozzi noted that JCP is the only retailer he knows where online sales are not growing.

Will Things Improve?

Not in the near future. While a comprehensive transformation plan like the one announced by JCP does take time to show results, there is no doubt the company made a huge mistake by completely doing away with coupons and sales events and instead option for an everyday low price strategy. The move has backfired. For JCP to get back on track, the old J.C. Penney, as Johnson calls it, will have to improve sales substantially. Otherwise, the losses will continue to mount for the retailer.

Interested in Additional Analysis?

The story of J.C. Penney is long and full of colorful history. Incorporated in 1913, the company has suffered alongside the nation through many recessions over the last hundred years. Now the company faces unprecedented challenges and struggles to regain profitability. Investors have to wonder if this company's century-long story is about to come to an end. In order to help you answer that question, The Motley Fool has compiled a premium research report with everything you should know about J.C. Penney. Simply click here to get started.


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