An Everyday Discounter in the Making
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When JC Penney (NYSE: JCP) announced its plans to sell discounted products every day and add specialized sections in its stores to promote individual brands, this plan probably seemed familiar to investors who knew Target. JC Penney hired former Target executive Michael Francis, who knew how Target designed its store layouts and marketing strategies, but now Michael Francis has left JC Penney. Even without Michael Francis, CEO Ron Johnson still plans to go ahead with the discount strategy. So I wondered how well JC Penney could compete if it became more of a discounter, comparing it to companies like Target (NYSE: TGT) and TJX (NYSE: TJX) instead of department stores like Macy's and Nordstrom.
Target recently announced a dividend increase, and reported earnings and income growth in its Q1 report, which suggests that everyday discounts and specialized brand sections have worked well for Target. Both Target and JC Penney sell clothing and many other products, but these companies originally focused on different market segments. JC Penney was more of a mid market department store, while Target was a discounter.
A visit to Target and JC Penney's websites in June 2012 showed that Target clearly bases its marketing strategy around discounts, while JC Penney has more of an emphasis on its designers and brands. Target's intro page offers opportunities to save 10 percent, 15 percent, and 30 percent on its current store stock. Although Target does show off some people wearing its clothing, the company clearly plans to use a value proposition to close the sale. Models and their outfits take up most of JC Penney's main page, with some room for the names of the designers and the prices at the bottom.
With its pricier clothing, JC Penney still has a higher gross margin, at 35%, than Target has at 30%. Focusing on a deeper discount strategy could reduce JC Penney's gross margin even further, although Target can earn greater profits with a lower gross margin as compared to JC Penney. Major clothing discounter TJX has a lower gross margin than both JC Penney and Target, at 28%, and TJX achieved a 7% profit margin anyway. The more JC Penney focuses on discounting, the more important competing with TJX becomes, and TJX is also large enough to be a major factor in Target's decisions.
TJX' intro page covers the TJX holding company, so I decided to get a better picture of the company's current clothing business by visiting the intro page of its flagship clothing store, TJ Maxx. Immediately, TJ Maxx' price comparison promotions stand out, as TJ Maxx offers the same clothing lines that department stores like JC Penney offer at much cheaper prices. As Jayne O' Donnell's USA Today article explains, TJ Maxx even offers a few high end luxury brands on its shelves, although luxury designers often don't want shoppers to know whether their clothing is available at a discount store.
A move toward deeper discounting for JC Penney could cut into TJ Maxx' sales, as TJ Maxx' clothing wouldn't be as cheap in comparison with department store clothing as it was before. One major challenge for JC Penney would be keeping its existing design relationships, although Target's experience shows that some prominent designers are willing to sell their clothing in discount stores. The loss of Michael Francis could be important here, as a former Target executive might have experience convincing designers to sell their clothes at a discounter.
When I made a CAPS underperform call on the company at the end of February, JC Penney had rallied to more than $40 after the turnaround announcement. After a recent weak earnings report and today's headlines, JC Penney shares have dropped to slightly more than half of their February price at $22.25. Target and TJX look well prepared to compete in the discount clothing market, and the loss of a prominent executive doesn't make things easier for JC Penney.
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