Becoming America's Favorite Store
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When the going gets tough, the tough get going -- these are words that Ron Johnson, former Apple retail chief and hopeful savior of J.C. Penney (NYSE: JCP) is taking to heart in his heroic endeavor to turn the disheveled company around. Riddled with weak sales, mismanagement and an overall lackluster image, J.C. Penney’s “fair and square” business has taken some serious hits that many argue can’t be recovered from. While trying to get the company back on its feet, the spotlight will surely illuminate Johnson’s efforts, but the makeover he has staged has the potential to result in a remarkable revitalization of the dismal retailer and leave him shining yet again.
Between cluttered stores, complacent business operations and a worn out appearance, JCP’s revenue growth has decelerated over the last five years to -13%, while competitors Kohl's (NYSE: KSS) and Macy's (NYSE: M) have posted an increase of 14% and a dormant 0%, respectively. These numbers only give a snapshot of how poorly J.C. Penney has been performing in comparison to its peers, but when all of the appalling numerical layers are peeled away there is a fundamentally sound business at the core, waiting to flourish under the right guidance.
Think about the difference in store appeal between say, a RadioShack and an Apple -- and then think about which one you’d rather have your products displayed in as a merchant. By cleaning up their scattered store appearance and implementing organized branded shops within, like they’ve done with the largely successful Sephora, J.C. Penney will be able to attract higher quality brand names as well as strengthen some of the big-name partnerships that they already have. Also, when a store exudes a sense of dignity like Apple’s does, customers feel more inclined to spend money there as it imparts a more quality shopping experience.
Unfortunately, they can’t have their clothes and wear them too. Before reaping any of the benefits from this revamped appearance, forfeiting some of their sales is inevitable in the interim, which is what seemed to flabbergast investors last quarter. If you recall, The Gap (NYSE: GPS) floundered in a similarly helpless fashion at one time, losing close to 50% of net income in the early stages of their turnaround, but then went to gain 60% in stock price thereafter -- these sort of comebacks aren’t always fantasy.
Johnson’s plans don’t even detail any public announcements until August of this year anyways, so writing him off this early in the game is a bit rash. However, when J.C. Penney does begin its new advertising campaign in a few months, it will be much more focused and concise, helping pocket some extra cash that was previously blown by inept management on useless advertising. In 2011, J.C. Penney spent 6% of revenue on advertising while Kohl's spent about 5% and Macy’s only about 4%. To put it another way, reducing that 2% margin differential to Macy’s could save J.C. Penney hundreds of millions of dollars in advertising expense.
J.C. Penney’s turbulent management history created a heck of monster that not too many people would attempt to tame at this point, so regardless of the end result Johnson deserves commendation for willingly putting his Apple-sized reputation on the line, and his reformed management dream team as well for taking up a position with migraines bolded in the PD. What’s more is that Johnson put his own money where his mouth is, dropping $50 million on JCP warrants with a strike price of $30 that can’t be sold for at least six years -- I’d say there’s some confidence somewhere in that mix.
Of course, these are just a few of J.C. Penney’s key areas that will be cleaned up under new management -- no one article could address a solution for every troubled aspect of the company. By all means J.C. Penney has a long road ahead in becoming America’s favorite store, but that’s what Ron Johnson and company signed up for. If all goes as planned, it will become a monumental success.
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