A Retail CEO Deals "Drugs"

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J.C. Penney (NYSE: JCP) CEO Ron Johnson is dealing "drugs."

Let me back up a bit. In January, new-CEO Johnson described his turnaround strategy for the musty retail chain. His plans included “stores-in-stores” concepts for brands and a new pricing strategy that focused on everyday values rather than promotional events and coupons. JCP used to hand out coupons like Costco hands out food samples, so the new strategy didn’t sit well with shoppers. Johnson expressed surprise in May that cutting the coupons equaled fewer customers. He went on to compare coupons to a drug

Last week, JCP sent out an email blast to customers, offering $10 off $10 minimum purchase through November 4th. A company spokeswoman told The Wall Street Journal that the offer was a “gift” and said that it was “in no way a reflection of a departure of our fair and square everyday low prices.”   

Running that through the PR translation filter: “Oh, God. We screwed up. Please come back. We have coupons!”

If this “gift” is a sign that JCP will be more forthcoming with its special offers in the future, the company may have a slight chance at staying on track. Johnson’s plans are still going to be a tough sell.

The Apple Falls Far

JCP shares spiked 17% on the day, in June of last year when Ron Johnson was named as the next CEO of the company. Johnson had a strong pedigree. He helped Target develop its merchandise so that it began to appeal to higher end brands (and customers) than stores like Kmart. He then served as the Senior VP of Retail at Apple (NASDAQ: AAPL), where he fathered the successful Apple Retail Store concept along with the tech support Genius Bars within the stores.

The move to JCP seemed an odd one for Johnson, but he wasn’t going to be given any large keys to the Apple empire and he may have wanted the dual satisfaction of being (mostly) in charge and having a turnaround challenge.

And a challenge he found. The prevailing problem is that Johnson doesn’t seem to know where he is. He thinks he can apply the same strategies he used at Apple (and Target) to fix the JCP slide. When Johnson started at Apple in early 2001, the first iPod was months from release and the iPhones were more than half a decade away. The Retail Store concepts were a good idea from a merchandising standpoint but Johnson also had the backing of some of the most popular technology products in recent history. The sales per-square-feet at the Retail Stores are guessed to be up to $7,000. Johnson could only hit that metric at JCP if he found oil under the foundation.

Even comparing JCP to its closer rival, Target, doesn’t match up. Johnson worked in a variety of roles at the retail chain, working there for over 15 years and leaving only for the job at Apple. In the late 80s and early 90s, Target was ramping up its nationwide expansion. The stores already carried a higher end products before Johnson came on. He helped forge new specialty deals with high profile designers that created a buzz for the company.

It’s going to be difficult to start the same kind of buzz with the brands that JCP has to work with.  

Concepts Become Reality

The idea of stores-within-stores, or concept stores, has had a long history of popularity in Asia and at domestic cosmetic counters.  Johnson hopes that J.C. Penney stores will have 100 different brand modules in-store by 2015 covering a wide range of products.

The initial wave of concept shops launched in August at nearly 700 stores across the country. The focus was on denim with brands like Levi Strauss getting top billing alongside JCP’s proprietary Arizona brand. Levi’s maintains a decent brand presence, if it isn’t sometimes considered a bit dated. Arizona doesn’t have a brand presence outside JCP’s walls.

Johnson told analysts last month that the brands operating in the mini-stores were earning 20% more than other areas of the store. The modules are designed to be interactive, with flanking iPads displaying brand information and employees trained as fit technicians. Another wave of modules, for the Izod and Liz Claiborne brands, launched in September.

The general consensus is that the shops, and the general remerchandising of even the non-branded areas of the stores, make for a more attractive shopping experience at JCP. But it can be the most attractive retail space ever invented – the Wonka Factory of fibers, if you will – but it still won’t matter if no one comes inside.

Heads Down

Johnson wanted to cut down on the number of promotions and eliminate coupons for several reasons. The nearly 600 promotions per year that the store previously ran cut into revenues and made customers leery of going to the store when there wasn’t a promotion or coupon available. Johnson cut promotions to 12 per year and eliminated the drugs…err, coupons.  He instead focused on lowered everyday prices. Products at JCP now show a manufacturer price and the lowered JCP price.

These strategies really didn’t go over well.

The first quarter report was the company’s worst in over 30 years and resulted in a suspended dividend. Year-over-year metrics were falling like dominos: sales were down 20%, gross margin dropped nearly 3%, and comparable store sales were down 19%. Store traffic was down 10%. Sure, it could have been a simple case of a rocky start. Things could look up!

Yeah, not so much. The second quarter was so bad JCP pulled its full-year guidance. Sales were down 22.6% (y-o-y) and comparable store sales were down nearly 22%. Store traffic was down 12% year-over-year.

The third quarter could fare slightly better. It includes the period during which JCP held its back-to-school promotion for free children’s haircuts. In mid-August, Johnson said that store traffic was only down 7% so far that month.

Compare Receipts

Bringing back coupons isn’t going to be the savior of JCP, but it’s possible that the move could stop the bleeding long enough for Johnson to fashion a tourniquet. To see why the struggles could very well continue, take a look at Kohl’s (NYSE: KSS), which has partnerships with high profile designers like Vera Wang and Lauren Conrad and an everyday lowered pricing strategy and still runs frequent promotions and coupons.

In the first quarter of this year, Kohl’s profits fell 23% (y-o-y) due to the impact of price cuts on margins. That’s with same store sales rising 0.2% in the period, compared to the previous year, and revenues rising to meet analyst estimates. Restocking issues led to a weak second quarter that featured year-over-year declines in profits (20%) and same store sales (2.7%).

As Kohl’s numbers show, retailers don’t have much wiggle room right now when it comes to mistakes. It becomes necessary for the stores to take temporary blows, such as the profit margin hit Kohl’s took, in order to ensure long-term survival. JCP needs to take the blow of coupons and promotions. 

Closing Time

Johnson has had reasonable success convincing investors that the ship isn’t on fire and that the rats are all just going for a jog in the same direction. He makes the extremely valid point that a turnaround like the one he’s staging takes time – up to three years of time.

But customers are a fickle lot, particularly in this economy, and the cutback on promotions and coupons is taking away the only thing that JCP is currently known for. It’s going to be increasingly hard for JCP to compete with stores like Kohl’s, which aren’t doing particularly well either.

Johnson needs to realize he can’t apply the same strategies he would use at Apple to JCP. There isn’t the brand awareness and loyalty to merit that.

Push those drugs, Ron. It’s what the customers need.  

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