J.C. Penney Could Be Heading for a 180

 | Nov 08, 2012 | 8:45 AM EST  | Comments
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Remember the J.C. Penney (JCP) first-quarter analyst day? Ron Johnson told the Street the company was 29% through year one of its transformation and ahead of schedule. At the time, same-store sales were down 18.9%. Investors were thinking, "Wow -- what does 'behind schedule' look like?"

Friday will mark the 77.5% point of year one. For the third time this year, Mr. Johnson will take the stage in front of investors and answer the question, "Just how bad is it?" Also on Friday, it will have been 283 days since Bill Ackman of Pershing Square, on CNBC, described J.C. Penney's first analyst day as the "most important day in retail in 25 years." The question is: Has anything really changed in the past nine months -- other than free haircuts -- that will catapult this company to its goal of becoming "America's favorite store?"

Same-store sales are likely still down well into the double digits. While comp results may not be as bad as they were in the second quarter's 21.7% dip, they probably aren't much better than the 18.9% drop seen in the first quarter. Removing the coupon drug is still taking its toll on J.C. Penney's loyal bargain-savvy core consumer. That consumer has voted on Fair and Square Pricing, or everyday low price (EDLP) -- but, unlike President Obama, this may not get another four years.

Mr. Johnson's goal was to add transparency by simplifying pricing, as well as cutting costs and confusion from changing "sale" signage. To be sure, 12 promotional packets per week were reduced to one per month at savings of $50 million. But, while EDLP was supposed to present the idea of a fair deal, the reduction in promotions has simply backfired. Value is often perception. Perception has voted, and coupons win.

Some changes to the pricing strategy have been made -- for instance, in the elimination of month-long specials in favor of a two-tier pricing structure. But there are signs, after less than one year, that the company may be moving closer to doing a 180-degree spin on strategy. A recent email promotion from Mr. Johnson to customers offered a "gift" of $10 with a purchase of $10. Maybe this was just a way to get customers to visit the new J.C. Penney, or maybe it is a sign of things to come -- a return to the coupon drug. My take? As retailers continue to compete for market share through promos, J.C. Penney will be forced to return to where it came from (video link).

A few things have changed since we first met Ron Johnson back in mid-January. First, the idea of guidance has been put on the back burner, and I hope that continues. Second, when it comes to comments from insiders that add to volatility and confusion, a conservative approach may be the best approach going forward. I'm talking about commentary from activists like Bill Ackman; from fashionistas such as Nina Garcia, who said new store was a game-changer on Twitter; and from Mr. Johnson himself. Just recently Johnson himself told investors shop-in-shops were running 20% better than the rest of the store -- and, yet, the store was running down double digits. That comment was followed by a mention that business has been tough in the past two weeks.  

Sometimes less is more.

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