For more than a year Macy's (M) has outperformed J.C. Penney (JCP), though it has lagged behind other retailers like TJX Companies (TJX), Kohl's (KSS) and Limited (LTD). This may change soon, however, as a refurbished J. C. Penney has corrected one of its strategic mistakes: The elimination of store coupons that usually bring in the consumer crowds. That's why I would consider swapping J.C. Penney for Macy's, especially after the recent correction of the stock that trades close to 30 percent its enterprise value.
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Last year, Ron Johnson designed J.C. Penney stores after Apple's (AAPL) stores, eliminating at the same time a long-held retailing tradition: store coupons. But the new stores failed to attract the consumer crowds, hurting both the top and bottom lines of the company. The problem? A big difference between Apple's stores and J.C. Penney stores.
Hype! Apple's marketing machine and unique products already hype customers heading for its stores. They know what they want; they don't need conventional sales promotions to be lured to the stores. But J.C. Penney doesn't have a similar marketing machine, and its products aren't unique either - they are carried by Macy's , Kohl's , Wal-Mart (WMT), and Target (TGT) - to mention a few. This means that J.C. Penney's customers have yet to be hyped by traditional sales promotions, something Ron Johnson did away with once he assumed the helm of the company by introducing everyday low prices and eliminating store coupons.
For beginners, consumers are both rational and emotional beings. As rational beings, consumers decide by reason, by balancing goals and constraints, surfing the Internet for the best price and clipping store coupons. As emotional beings, consumers decide by emotions like hype, rushing and racing to copy and imitate other consumers, and to take advantage of limited time offers that they fear they may lose out. This is especially the case for discretionary items like clothes and accessories. That's why sales promotions work so well for department stores, and taking them away was a strategic mistake for J.C. Penney that undermined its refurbishing initiative.
So far, J. C. Penny's strategy has not worked. Last quarter, the company reported a larger-than-expected decline in quarterly sales at stores open at least a year - the third straight quarter of severe sales losses since changing its pricing strategy last winter.
Obviously, the price change that eliminated sales through coupons for everyday low price was a strategic mistake that, in our opinion, comes from a misunderstanding of its leadership of the difference between J.C. Penney and Apple stores, which was corrected last month. Coupons and sales racks have come back, and so will eventually the stock. That's why I will begin accumulating it.