J.C. Penney Capitulates

 | Feb 28, 2013 | 8:30 AM EST
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The capitulation is complete. Just one year and lots of cash burn later, J.C. Penney (JCP) CEO Ron Johnson admits "he made some big mistakes last year." The biggest mistake was yanking sales away from addicted bargain hunters without bothering to test the reaction. Johnson is a fan of truth on price tags in the form of everyday low pricing (EDLP). The problem is that the consumer does not perceive truth as a reason to buy. Now having posted four of the worst consecutive quarters of same-store sales declines in the history of retail, JCP is bringing back -- you guessed it! -- sales. But Johnson would prefer the word gift in some cases (that is, coupons are really gifts).

While we saw the return of the dirty word (sale) as inevitable, the question is: Is it too late? Comps this quarter hit a yearly low of 31.7% while online sales plunged 34%. Conversion rates (-10%) and traffic (-17%) are not moving in the right direction. The bottom line is that JCP customers have headed for the exit and it might take a lot of begging to get them back. With gross margins already down more than 600 basis points (bps) this quarter, driving traffic back in the stores will not be inexpensive. Translation: big sales, even lower gross margins.

While there are plenty of stats from the quarter to pick apart (which many people did on Twitter), the most interesting part of last night's conference call was not the long-awaited admission that the "no sales" strategy was a failure. Rather it was Johnson's complete reversal in willingness to give us reason to hope. Just two weeks ago, in a CNBC interview, Johnson suggested 2013 would be a year of return to growth. That statement gave me a flashback to when JCP issued guidance last year with resounding confidence. We all know how that worked out. Last night, when he was questioned about current business, Johnson told investors he does not want to be in the guidance business. He also went a step further. After elaborating on shop-in-shop performance last quarter, we learned no updates on shop-in-shop are coming until one year after opening.

With the worst comp of the year in our back pocket and no update on February (flat comps were floating around in the media), it is going to be a long wait. 

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