For more than a year, J.C. Penney's (JCP) stock has been dropping like a stone, while other retail stocks have been soaring. The problem? A radical pricing strategy that replaced conventional sales promotions, including coupons, with everyday low price - shoppers didn't go for it, legal woes, and a leadership shake-up that have taken their toll on the company's performance (see table).
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
On Friday, J.C Penney's stock soared. The catalysts? A vote of confidence by George Soros. The legendary financier took a "passive" 7.8 stake in the company; a financial arrangement with Goldman Sachs (GS) that didn't include any equity stake by the financial firm.
These developments come shortly after the company changed strategy, returning to the old sales promotions to be implemented by the appointment of J.C. Penney's old CEO replacing Ron Johnson. Will this new policy bring shoppers and investors back? What should investors do?
To answer these questions, we must first understand Ron Johnson's strategy to re-organize J.C. Penney stores after Apple stores.
J.C. Penney and Apple (AAPL) stores have one thing in common: Their appearance is meticulous, and Ron Johnson has designed them. But they are different in one respect: Apple's stores are always crowded and sales are soaring, adding to the company's top and bottom lines. J.C. Penney stores, on the other hand, are striving to attract customers, and sales are souring, hurting both the top and bottom lines of the company. What makes this difference?
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 (M), Kohl's (KSS), 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 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 second 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, that comes from a misunderstanding by its leadership of the difference between J.C. Penney and Apple stores. Now the company comes to correct this mistake. Will it work?
The answer is yes. The strategy works for other retailers and did work before for J.C. Penney. That's why the stock deserves another look for long-term investors, especially at these price levels.