At the beginning of 2012, J.C. Penney (JCP) was almost an afterthought in the retail world. While giants like Kohl's (KSS) and Target (TGT) were dominating the retail apparel and household goods markets, J.C. Penney sales and earnings were lagging. It was then that Ron Johnson announced his turnaround strategy that would put the company back on the map.
One of the main features of the strategy was to eliminate event-driven "sale" pricing. Johnson felt that these things drove temporary traffic from people looking for a good deal but didn't build any lasting customer loyalty. In its place, Johnson established its "lowest price" campaign whose goal was to sell merchandise every day for sale-level prices so customers wouldn't have to wait for a sale event.
While initial reaction and results to the plan were encouraging, it proved to be nothing more than a temporary boost to the bottom line. It's been over a full year since Johnson announced his turnaround strategy and to say that things haven't gone his way would be an understatement. The recent news has gotten worse and it may be time to acknowledge that J.C. Penney is now a company on the brink of failure. Let's take a look at the evidence…
Same-store sales are down 32% in the 4th quarter
Johnson's strategy that was supposed to drive sales and expand its customer base has tanked magnificently. How did this happen? The simple answer is that the J.C. Penney strategy does nothing more than compete on price. The "low price all the time" strategy ultimately ends up just driving deal seekers through the front door and once they're able to find a better deal somewhere else they'll just walk right back out the door again. There's really nothing about the J.C. Penney shopping experience that differentiates itself from any other big box retailer.
The company continues to make massive layoffs
J.C. Penney just last week announced another round of layoffs that will eliminate almost 1500 jobs from the bottom line. That's in addition to the 300 headquarter jobs it cut last month, another 1000 layoffs it announced in January and the 8000 employees it let go last year. Clearly, this is a company that's trying desperately to control costs and improve cash flow. Speaking of which…
It's burning through cash
Part of Johnson's turnaround strategy is to rebuild many of its retail locations with its "shop-in-store" concept where each store contains several product-centric mini-shops within. The problem is that J.C. Penney is using a lot of its available cash to make it happen. If the shop-in-store concept isn't successful or J.C. Penney has difficulty getting the concept into most of its stores, its balance sheet could ultimately be left with precious little flexibility or resources for the future.
Insiders are getting out
J.C. Penney board member Steven Roth added fuel to the fire earlier this month when it was announced that his Vornado Realty Trust (VNO) had dumped 10 million shares of J.C. Penney stock. While Vornado still owns 6% of J.C. Penney, this move is a clear signal that investor patience (as well as the Board of Directors' patience with Johnson) may be starting to run low. Penney stock dropped over 10% on news of the sale.
It's already backtracked on their strategy by offering sales again
Management appears to have panicked on its new pricing model when it began holding sales on jewelry sold in store (the company calls these "events" as opposed to sales but let's just call them what they really are). Additionally, J.C. Penney is also offering $10 "rewards" (the replacement word for "coupon") when a customer spends $10 in store.
Why should an investor be sold on Johnson's turnaround strategy when it's already switched back to the old way of doing things? The answer is they shouldn't.
The potential for Johnson's ouster as CEO or even a company sale
The hot rumor is that Johnson is being given until the end of the year to show a meaningful turnaround in the bottom line or he's at serious risk of being fired. Considering the 4th quarter earnings report, it might not even take that long. Johnson is clearly on a short leash right now and any change at the top puts the company and its future strategic direction in doubt - a strategic direction that could also involve a sale of the company much like the one at Dell (DELL) earlier this year.
Sometime during 2013 we should have a good idea if Ron Johnson's strategy for J.C. Penney leads to a stronger competitor in the retail space or if it ultimately leads the company to its demise. Time is simply running out for the company to right the ship. Unfortunately, it might already be too late.