The Level of Delusion is Amazing at This Company
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are times when I really wish company executives would just say what's happening. How about some truth? I know that they have to try and reassure shareholders, but I also believe that shareholders are thinking individuals who want to know that management understands how big a problem is. When J.C. Penney (NYSE: JCP) hired CEO Ron Johnson, I hoped to see this old school retailer turn around. I root for the underdog and it's gratifying to see companies re-invent themselves. However, since taking the helm at J.C. Penney, results have spiraled downward and only decisive moves will solve this problem. Let's look at J.C. Penney's most recent earnings report, and I'll tell you what I see, and give you some ideas of what the company can do to improve its future.
Terrible Results & Delusion From the Top:
Many people have heard the headline numbers, but they bear repeating so that investors understand how horrible J.C. Penney is really doing. Total sales were down 22.6%, on the back of an almost unthinkable decrease in comparable sales of 21.7%. Even more disappointing was the company's online sales decreased 32.6%. With massive sales declines across the board, it's not surprising that the company reported a net loss for the quarter. What was most disappointing to me was the CEO's seemingly cavalier attitude about these horrific results. He said, "We have now completed the first six months of our transformation and while business continues to be softer than anticipated, we are confident the transformation of J.C. Penney is on track. The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course."
Excuse me, but what exactly is he looking at? The only transformation happening at J.C. Penney is from a struggling business to one that disappears. As proof that this delusion runs deep he also said, “"This month we simplified our pricing, launched the first of our new shops, and accelerated our marketing efforts to focus on brands, products and value. Early response to these efforts has been very encouraging." Nothing has been encouraging about the company's most recent earnings reports. However, there are several steps that could take the company in the right direction.
Close the Mall Stores and Open Free Standing:
It's real simple and yet the biggest challenge the company has ever faced. J.C. Penney needs to find a way to become relevant again. There are several steps as I see it, that the company can take to begin a real transformation. The first issue is, the old school way of running a department store doesn't work. This is proven by the prodigious growth of retailers like Target (NYSE: TGT) and to a lesser extent Kohl's (NYSE: KSS). What customers notice about both Target and Kohl's versus J.C. Penney is the location of the stores. In the majority of cases, Target and Kohl's operate stand alone stores or they are part of a strip mall concept. This is a huge advantage over J.C. Penney, which is located primarily as an anchor store to an enclosed mall. The first step that J.C. Penney must undertake is to close underperforming mall stores and recreate them as stand alone stores. The reason is simple, customers don't go to enclosed malls as much as they used to. If J.C. Penney is truly expecting to be a destination shop, it won't work to be stuck in an old mall location. Customers don't want to fight traffic getting in and out of the mall parking lot.
Centralized Checkout:
The second advantage that companies like Target and Kohl's have over J.C. Penney is their checkout locations are centralized. There is nothing that has turned off customers to mall department stores more than the impossible hunt for a cashier when they want to buy something. I remember the number of times when I was younger, hearing my parents getting aggravated because they were in a store like J.C. Penney and looking for a cashier. When a customer has to track down a cashier to make a purchase, you know the business model is in trouble. J.C. Penney needs to change the store format to bring customers to one place for checkout. This will allow for faster checkout times and a better customer service experience.
How am I Supposed to Carry This Stuff? - Shopping Carts:
Another big factor in driving customers away from department stores is the use of shopping carts. I know it sounds silly, but customers clearly like having a shopping cart to use in a store. Think about it, Wal-Mart, Target, Home Depot, Kohl's, and others, what do they all have in common – shopping carts. The reasons aren't hard to understand. If you are shopping at a store, what would you rather do? Would you rather carry everything around by hand while you shop, or would you rather put it in a cart, and be able to add more as you walk along? This is a big reason its easy to spend a lot of money at these large retailers. You have a cart you fill it up, when you get to the register and empty your cart, you empty your wallet as well. J.C. Penney, take the hint, rearrange your stores to make it easier to buy more.
Simplify and Advertise Online Site:
Last but not least, the online division needs some serious help. If you look at the company's web site, there isn't anything outstanding that you can't find at Target or Kohl's. In fact, it looks like J.C. Penney went to Kohl's web site and stole some of the formatting. J.C. Penney needs to not only publicize its better store arrangement (as suggested above), but they need to advertise jcp.com. To advertise this, the company also needs to use their www.jcp.com domain instead of www.jcpenney.com. JCP sounds better, it's easier to remember, and faster for customers. When customers have essentially forgotten you are still in business, you have to spend money to make them aware. By making it as easy as possible to remember your web site, customers are more likely to go there.
Conclusion:
As you can see, there are a lot of big changes the company could make to change the perception of their stores. The company will have to spend money advertising because the average customer has forgotten about J.C. Penney. With competitors like Kohl's expected to grow at about 11%, and Target expected to grow earnings at over 12%, the competition isn't standing still. Both of these companies also pay a dividend that J.C. Penney cannot afford. Investors should look at J.C. Penney as a potential turnaround and assess it with this type of risk in mind. The bottom line is J.C. Penney needs to reinvent itself completely. Sticking with being a specialty department store will only serve to continue to drive the company into the ground. Ron Johnson needs to begin making big changes or a real transformation will never occur.
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