The JCP Reign of Terror
Elizabeth is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few weeks ago I was browsing through my local JC Penney (NYSE: JCP), and I couldn’t shake the feeling that something wasn’t quite right. Sure, a few departments had switched locations, the customer service desk was permanently closed down, and the usual hodgepodge of overstuffed racks and shelves were stripped bare, but none of these factors were the root of my unsettledness.
An employee friend ran up to me, and after exchanging greetings, I mentioned that something seemed different about the store. The new CEO, Ron Johnson, she informed me, was flipping JC Penney upside down; his plans were to eliminate the “clutter” of racks and racks of merchandise, retire coupons and sales events in favor of “every day low pricing,” and even to add a wireless hotspot with a sitting area near the front of the store.
His JCP “makeover” apparently also included laying off more than 600 employees nationwide in April and 350 more in early July, as well as drastically cutting funds for product development and research. “We don’t know if we’re going to have jobs tomorrow,” she’d said.
Finally, I pinpointed what was wrong- I was the only customer on the entire floor of the store.
It wouldn’t take a top-notch Wall Street guru to predict disaster for JCP’s August 10 earning report. In the six-month period February 9 to August 9, the stock tumbled 49% from $43.13 to $22.10, as both sales and customer satisfaction nosedived. Analysts were less than optimistic; they predicted a loss of $0.25 on $3.2 billion in revenue. Even with such low expectations, JCP managed to further disappoint with its report of a loss of $0.37 on $3.07 billion in revenue. All right, says the discerning individual investor, how much did the stock drop after this hot mess was dumped on the public?
The price shot up 5.9% in one day, closing in at $23.40. Dear traders, have you gone mad? Did you fail to see the ridiculous drop of 21.7% in same-store sales over the course of a quarter? Did you take one glance at their balance sheet, and realize that a rabid selling of assets could be necessary in the near future? What about a second look at their newly-downgraded year-end earnings projections? Have you even walked by a JCP since Johnson took up position as CEO in November, and noticed one thing missing from the slew of transforming policies and renovations- customers?
The rise has been attributed, in part, to Johnson’s pep talk to investors, apparently raising excitement over the future of iPod-equipped employees and iPad use for customers while instilling a last seed of hope in desperate optimists. If there’s one thing Johnson needs to realize, it’s that Apple (NASDAQ: AAPL) and JCP are completely different beasts. One one hand, we have an internationally-acclaimed superbrand that’s grown an astounding 360% over 5 years, with exciting, innovative, and one-of-a-kind products. On the other, we’ve got a stale retailer selling generic, picked-over merchandise that’s lost over two-thirds of its value since 2007. The use of iPads and MacBooks in an Apple store serves a crystal-clear purpose- to market the products. What good would it do in a JC Penney?
The same goes for the new JCP pricing policies. Johnson thought he’d recycle a few ideas from his time as Apple Senior Vice President of Retail Operations by adopting the same no-sales, no-coupons, no-fuss pricing strategy. Once again, computer and apparel sales couldn’t be more different. While everyone knows the intrinsic value of the Apple, it’s much harder for the customer to accurately determine an appropriate price for JCP’s medley of apparel products. (Are St. John’s Bay pants worth more than Dockers? Should boys’ clothing be more or less than girls’ clothing? Why is a king-sized duvet twice as expensive as a queen?)
Has Johnson simplified pricing? Yes, but he’s also cheapened the value of JCP merchandise. It’s all in the psychology- getting a shirt priced $60 for $20 feels like a great deal, whereas when you get a $20 shirt for $20, all you’ve got is a cheap, boring, and disappointing purchase. JCP was never the place for exciting products- and now, the excitement of the pricing has also been eliminated.
Pricing excitement clearly doesn't apply to every retail store- just take a look at higher-end chains like Nordstrom Inc. (NYSE: JWN), and it's obvious that there must be at least some other factors at play besides attractive bargains. Why can Nordstrom get away with charging upwards of $500 for oftentimes unremarkable pieces of clothing, while JCP is getting slammed for charging $40 for pants sans coupons? Nordstrom's got the luxury factor going for it; how much extra money are you willing to pay for a Coach versus a Roach pocketbook? A lot, apparently, because Nordstrom's market capitalization is near an all-time high of $11.29 billion, versus the rapidly sliding $4.97 billion for JCP.
Was Johnson trying to inject JCP with that luxury factor? If JCP suddenly stopped issuing coupons, he thought, will that turn it into a Nordstrom, which never issued coupons to begin with? Unfortunately, if this was the reason for the discount ban, Johnson forgot to consider the other variety of coupon-less retailer: Wal-Mart Stores Inc. (NYSE: WMT). Wal-Mart relies on a model of every-day low prices and a lowest-price guarantee to lure in consumers, and the bet of lowest prices anywhere is met with great enthusiasm by customers. What other reason could there be for its huge market cap of $248.35 billion: over twenty-two times that of Nordstrom and fifty times that of JCP?
If there's one trick to surviving as a successful retailer, it's finding a business model that works. Nordstrom provides customers with luxury brands at luxury prices. Wal-Mart offers consumers every day products and lower-end retail products at bargain-basement prices. Before the pricing switch, JCP was comparable to Macy's Inc. (NYSE: M), with stylish products, dependable quality, and frequent promotional events. In the efforts to transform its backdrop into that of a higher-end environment like Nordstrom by eliminating promotions and sales, JCP only succeeded in turning itself into a Wal-Mart level retailer, albeit without the convenience of offering other products besides apparel and without low prices. JCP took a business model that worked and destroyed it, bringing its stock price, revenue, and reputation crashing down with it.
If you haven’t already dropped JCP stock like it’s hot, now might be a good time to take advantage of the temporary spike in stock price. It won’t be long before investors realize the senselessness of today’s ridiculous drop in earnings/rise in price sequence, or before news of more layoffs, more store closings, and more earnings losses hit the public. Come on, Mr. Market- stop being so optimistic!
LizPowers has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.