When Ron Johnson first left his gig as head of retail stores at Apple (NASDAQ:AAPL) to become the CEO at J.C. Penney (NYSE:JCP), I was quite bullish on the latter. Until Steve Jobs passed away and Tim Cook went all normal on us, I maintained a long-term bullish outlook on AAPL as well. Obviously, things change.
For whatever reason, I found myself in a J.C. Penney store earlier this month. Unless it's a legendary, tall building tucked in the middle of a vibrant urban core, I'm not a big fan of the department store. They're inherently sterile, brain-drain environments. The only time I long to spend time in a shopping mall is when I'm in a department store that's attached to one.
J.C. Penney looks different since Johnson took over. About as different as a department store can look. You'll see different signs now, promoting different sales, which, according to the company's marketing, aren't actually sales. And now, the make-up counter looks and smells just as high-beam bright and repulsive as the one at Macy's (NYSE:M). David Axelrod must advise Johnson's "change" campaign just as he did the President's because I don't see any real "change" taking place at J.C. Penney. Whether Johnson knows it or not, he's playing a game of smoke and mirrors that likely will not end well.
Consider the following snippets from a story that featured Johnson's take on his company's new pricing strategy:
Less than 1% of J.C. Penney's revenues come from items bought at full price. By contrast, nearly three-quarters of merchandise sold by the department store chain is discounted by at least 50% off. What this tells shoppers is that J.C. Penney's original prices are pretty much meaningless. They're floated out there to see if any suckers bite, and also to make the inevitable markdowns seem more impressive ...
Johnson said that it's been a long time since retailers have been able to fool consumers with "fake prices":
From 2002 to 2011, the average cost that Penney paid for an item stayed about the same, from $9 to $10. During that period, though, Penney increased the average price tag to $36 from about $27. Yet even as the price tag rose, customers ended up paying less because of coupons or sales. "Now most things are on 60% markdown, and every time we do that, we're discounting Penney's brand," he said.
In J.C. Penney's new pricing strategy, those inflated original list prices will disappear. They'll be replaced by what it calls "Every Day" prices, which will be much cheaper (40% or more less) than the old MSRPs. The switch makes it possible to pay full price at J.C. Penney and not feel like a fool.
Here's the problem. J.C. Penney does not have a brand, at least not one that's meaningful.
It has name recognition, but that's different. I still have nightmares about the J.C. Penney catalog coming in the mail and my mother selecting my school clothes from it for me. Now, I have little, if any, reason to go to J.C. Penney. Neither does my wife or most other men and women that I know. In fact, my wife only goes there when she reads about a sale on an item you could buy at countless other stores.
That's why J.C. Penney sells practically everything at sale prices and almost nothing at full price. It does not have one product that could possibly serve as a worthy draw and, in turn, command a premium. Johnson's quote about "discounting Penney's brand" made me chuckle. Ron, I admire you greatly, but you're no longer at Apple. J.C. Penney does not have a "brand" and, as such, it has no business selling anything at full price. At least going with the moniker "Every Day" prices sounds more like a Wal-Mart (NYSE:WMT) ploy than an Apple one. Wal-Mart is certainly a more suitable comparison.
For Johnson to work his magic at J.C. Penney he needs fantastic products. They need to not only be exclusive, but exclusive products of high quality that particular well-off demographics will consistently pay a premium for and all others will hold as aspirational. Johnson needs what Lululemon (NASDAQ:LULU) CEO Christine Day has.
Day has all of the above - an exclusive, high-end, aspirational product that people cannot get enough of. She has pricing power. She has the ability to be aggressive and innovative. Sounds a bit like the position of strength Johnson's former employer operates from. Consider Day's apparent inventory "problem" this quarter via an insightful Forbes' article:
The largest take-away from Lululemon's earnings report was its rising inventory levels. Here a greater stockpile likely means greater future sales. Known for eschewing markdowns, Lululemon has grown into a $1 billion-sales business by convincing customers that its goods are scarce. Last year though it simply didn't have enough in the stores to meet demand: Building a brand on such a scarcity model forces a company to walk a very fine line ...
Lululemon's 2011 sales were hardly soft. The retailer crossed the $1 billion mark for the first time, rising 41% from the year before. Imagine what the retailer can do now that it actually has enough product. As long as it continues to shy away from markdowns - a large inventory sold at cheap prices can wreck a balance sheet - the stockpile of yoga pants will help.
Innovative yoga pants. New colors and styles in the clothing lines coming into stores now can attract both new customers and lure former customers back. "Even if you have five pairs of yoga pants in your closet right now, you're going to go back to reload," says D.A. Davidson analyst Andrew Burns.
Importantly Lululemon has expanded past yoga. There's menswear. Cold-weather gear. Scuba hoodies. Light-weight layers. And particularly impressive anti-chafing outfits for biking and running.
Yikes. Day is the top genius you've never heard of. She already has a brand that keeps ultra-loyal customers coming back, but she's adding a selection of other products to the mix that should work to increase the average sale. And, of course, she'll strategically deploy LULU's excess inventory and sell it at full price. That's what companies with a true brand can do. They call the shots. They do not have to feebly react to gaggles of fickle, bargain-hunting consumers.
So, again, without a strong brand that, in retail, can only emerge from strong products, Johnson cannot possibly innovate like he did at Apple. Plus, he doesn't have Steve Jobs around or, presumably, anybody like him to tell him when an idea sucks. That aside, I will use a line I generally dislike. At J.C. Penney, Ron Johnson is attempting to slap lipstick onto a pig. There's literally nothing he can do at J.C. Penney to elevate it into anything more than a battle with Macy's and other mall "anchors." That's a major yawner.
And that's really a shame because I consider Johnson one of the few people at Apple, outside of Jobs (and Forstall and Ives), who could have assumed the CEO role (and Ives might have been a questionable and unwilling leader) at the company as an innovator. (And yes, I realize Johnson holds an MBA, but he clearly was/is an integral part of Apple's culture).
It's quite a juxtaposition. You have J.C. Penney unable to succeed with an innovator, but no product and no leverage in the consumer marketplace. Apple, meantime, like LULU, has great products and all the leverage in the world, but it risks running low on innovation as Jobs' memory fades.
While I would never argue that Cook or Johnson were born to lose, they appear to have been put into positions were they're destined to fail.
(I have a special options-related prize for the first person to name the punk band that inspired that last sentence).
Disclosure: I am long LULU.