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I have been an individual investor for nearly 25 years. My professional background is in finance and investing owning a Bachelor's degree from Michigan State University. Currently, I focus on retirement and dividend income strategies primarily through the use of funds and ETFs. If you're... More
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  • 4 Steps To A J.C. Penney Turnaround 1 comment
    Apr 25, 2013 10:12 AM | about stocks: JCP

    J.C. Penney's (NYSE: JCP) first quarter earnings report is a little over a month away and it's quickly becoming make-or-break time for the retailer and its new (as well as former) CEO Mike Ullman. His predecessor Ron Johnson came in with much fanfare a little over a year ago with promises of turnaround, but so far revenue, earnings and customer traffic numbers are all headed in the wrong direction. It's clear that Ullman has a long road ahead.

    I wrote not too long ago detailing all the evidence that's piling up against J.C. Penney and suggested that the company may not survive much longer if it doesn't start turning things around.

    What's gone wrong at J.C. Penney has gotten a lot of press lately, so instead let's take a look at what the company needs to do right to get headed in the right direction again. Not all of these ideas are easy or simple to execute, but they should form the basis for where J.C. Penney needs to go in order to survive and thrive again.

    Bring the focus back to home goods

    There was a time not too long ago when J.C. Penney was considered the go-to store for home goods and furnishings. In 2006, home goods' sales accounted for 21% of J.C. Penney's total sales. But when the company took its focus away from home goods and onto clothing and fashion, its bottom line paid the price.

    In 2012, the home-goods category accounted for just 12% of sales. Worse, the company has lost significant market share to other middle-market retailers, like Target (NYSE: TGT) , Macy's (NYSE: M) and Kohl's (NYSE: KSS) as customers began looking elsewhere for fashionable merchandise at reasonable prices.

    J.C. Penney seems to at least understand the need to focus on the home-goods segment again, and appears to have a strategy to address this. A revamped home-goods section is scheduled to appear in about one half of J.C. Penney stores initially, and will feature big-name designers like Martha Stewart, Michael Graves and Jonathan Adler.

    Stewart's name has become virtually synonymous with home goods, Graves is a well-respected name in the world of design and Adler's presence as lead judge on the Bravo reality series Top Design should lend credibility and familiarity in wooing the younger customers into the store.

    It's a direction that provides a glimmer of hope, as J.C. Penney needs to get back to its bread and butter that helped put it on the map in the first place.

    Fix the J.C. Penney culture and get employees to buy back in

    One of the more remarkable things that has become news since Ron Johnson took over is how vitriolic the corporate culture at J.C. Penney has become. I pulled up a story just recently that's titled "Inside J.C. Penney: Widespread Fear, Anxiety, And Distrust of Ron Johnson and His New Management Team." And there are lots of other stories out there just like it.

    J.C. Penney employees all the way from the front lines to the executive offices have become vocal about how difficult it's become to work there. Allegations of rampant rumors, lack of communication and the constant fear of layoffs have left very little "buy in" from many company employees.

    The corporate culture issue has affected customers, as well. Shoppers have reported issues with their overall experience from a lack of greeters at the doors to long lines at the checkout to a lack of knowledgeable store employees.

    If your employees don't buy into the turnaround plan and openly resent the management team in place, it's going to be very difficult to turn things around.

    Decide on a pricing strategy and stick with it

    Johnson made the decision at the beginning of his tenure to go with a "lowest price all the time" strategy, and made the move to eliminate sales, coupons and gimmick-pricing. He did this in an attempt to let customers know they were getting the store's best price all the time and, theoretically, drive more consistent regular traffic to the stores. The strategy didn't work, as shoppers got confused by the pricing structure and were left feeling like they weren't getting adequate value.

    Johnson recently backtracked on that strategy, bringing back sales in selected merchandise like jewelry (labeling them as "events" instead of sales) and offering rewards coupons when a specific amount is spent inside the store.

    The decision has left both shoppers and analysts who follow the company confused as to what strategy J.C. Penney actually plans on following next.

    It's understandable that management would resume the coupon strategy because everybody knows that shoppers are suckers for deals and savings. People will buy lots of things that they don't need if they feel they're getting a deal on the merchandise. But "Johnson and company" need to decide on the retailer's pricing strategy and stick with it. The back-and-forth waffling is doing nothing but creating confusion and hurting the company's already-damaged reputation.

    Go after the younger shopper

    For better or worse, J.C. Penney has a reputation as an older person's store. Whereas retailers like Target and Kohl's have focused on trendier styles to draw in the younger customers (the ones that tend to spend more money in the store), J.C. Penney by and large has stuck with stodgier dated brands that tend to appeal to an older clientele.

    The move toward more recognizable designer names should help, but J.C. Penney needs to target the younger shopper hard. If a young person is going to shop for clothes, I'd venture a guess that J.C. Penney wouldn't even appear in the top-10 list of places to hit. That stereotype needs to change.

    Companies like Target and Kohl's have leadership positions in the middle-market retail space, while places like Nordstrom (NYSE: JWN) and Macy's are strong in the high-end space. J.C. Penney needs to figure out where it can fit in and where it's going to compete. Management needs to figure it out soon before the company becomes irrelevant in the retail world altogether.

    Conclusion

    J.C. Penney executives are quickly running out of time to turn the company's fortunes and, truthfully, things might already be too far gone.

    The decision to try to pull Martha Stewart away from Macy's is proving to be a big mistake. Johnson felt like Macy's was just going to roll over and give up in the face of a fight and that hasn't been the case at all. Macy's has much deeper pockets than JCPenney and is correctly fighting to keep the Stewart relationship and away from its competitor. If reports are to be believed, Ullman is already looking to back out of the 10 year $200 million deal that Johnson signed with Stewart and presuming that issue is settled in the near future (which could include JCPenney paying Macy's legal fees) Macy's should be able to finally move forward.

    JCPenney might also be well served to adopt a Kohl's-like pricing strategy. Instead of just discounting merchandise on a regular basis (which Kohl's does very well), they also hand out Kohl's cash at the rate of $10 for every $50 spent. Additionally, they regularly send out customer coupons on "everything you buy" up to 30% off. At the checkout, the cashier makes a point of telling you exactly how much you saved on your visit and circling the number on your receipt. What better way to drive home the point of customers receiving value? It's something that JCPenney management could learn from.

    I don't think that any of the suggestions above would be a magic elixir that will fix all of its problems but I do believe that these are logical and attainable goals that will lead J.C. Penney back down the road of relevancy.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: JCP
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