I own shares of J.C. Penney Company, Inc. (NYSE:JCP), but after Wednesday’s news, I’m seriously considering selling my stake. According to Reuters, the retailer will increase prices on its clothes, only to later mark them down — a strategy the company used to employ before CEO Ron Johnson took the helm in 2011. Evidently, management believes this strategy will help lure discouraged shoppers back to its stores.
Ron Johnson’s turnaround strategy has floundered
It’s no secret that Ron Johnson has been having a difficult time at J.C. Penney. On Feb. 27, the company reported a quarter some have characterized as the worst in retail history. Year-over-year, same-store sales dropped by nearly a third, while the company posted a loss of almost $1 billion.
Many have blamed J.C. Penney Company, Inc. (NYSE:JCP)’s problems on Johnson’s decision to embrace a strategy of “everyday low prices” — consistent, low pricing; no coupons or discounts.
Most retailers use discounting as a way to bring customers into the store. (Just yesterday, I received an email from Express, Inc. (NYSE:EXPR) urging me to come into the store, informing me that everything had been marked down by 40%.) By eliminating discounting, the impetus to shop is likewise eliminated.
Can everyday low pricing work?
That said, everyday low pricing can work: Wal-Mart Stores, Inc. (NYSE:WMT) is proof of that. In fact, the words “everyday low prices” are practically synonymous with the company, the world’s largest retailer. If it works for Wal-Mart, why can’t it work for J.C. Penney Company, Inc. (NYSE:JCP)?
Some might argue that Wal-Mart is primarily a grocery store chain with a large selection of other goods, and that when it comes to selling clothes, everyday low pricing can’t work. While it’s true Wal-Mart does rely primarily on grocery sales, the company does have a solid apparel operation. What’s more, on the company’s last earnings call, management cited apparel as a growth area.
Of course, Wal-Mart has stuck to this strategy for years. Consumers feel confident that when they go into a Wal-Mart, they truly are getting the lowest prices — no coupons necessary. Building that sort of image takes time.
Today, virtually no one questions Wal-Mart’s pricing strategy, even bears. Instead, Wal-Mart is seen as a direct play on the consumer: when JPMorgan downgraded Wal-Mart last month, analysts cited the payroll tax increase — not the company’s prices as reasons to be bearish on the stock.
Surprisingly, Kohl’s has not benefitted from J.C. Penney’s demise
Some investors might have assumed that competitor Kohl’s Corporation (NYSE:KSS) was poised to gain from J.C. Penney Company, Inc. (NYSE:JCP)’s decline. The retailers operate in a similar market niche and generally sell similar product.
Yet, Kohl’s has been unable to capitalize on J.C. Penney’s mistakes, despite leaving its own strategy the same. Over the last year, shares of Kohl’s are down nearly 13%. That’s better than J.C. Penney’s performance, as its shares are down about 60% over the same time span, but still significantly worse than the broader S&P 500.
In a note released last week, analysts at Morgan Stanley downgraded Kohl’s to Underweight, citing economic factors like the payroll tax increase. But interestingly, Morgan Stanley also cited renewed competition from J.C. Penney Company, Inc. (NYSE:JCP), with the return of its discounting strategy.
Maybe everyday low prices aren’t to blame
Lost in all this is the possibility that the lack of discounts are not to blame for J.C. Penney Company, Inc. (NYSE:JCP)’s current state. It seems as if everyone has just blindly accepted the loss of discounting as the key driver for the company’s ills, and not considered other factors.
There are a number of other reasons J.C. Penney’s same-store sales could’ve fallen. In addition to ditching everyday low prices, management changed the company’s advertising, remodeled stores, and changed its clothing brands.
On the company’s last earnings call, Johnson declared that “our marketing didn’t connect very well with our customers last year.” Until Michael Francis was fired from J.C. Penney last June, the company undertook a progressive advertising campaign, including a father’s day ad thatdrew calls for a boycott from an anti-gay group.
J.C. Penney has been remodeling its stores, and while they do look cleaner and more organized, the stores have had their general image changed, with a new logo and eclectic background music. Those subtle atmospheric changes could alienate consumers who have shopped at a familiar store for decades.
Then of course, there’s the changing product. As J.C. Penney has introduced its new store within a store concept, its naturally led to less floor space for traditional J.C. Penney brands. The company has also shifted some of these brands, introducing a new JCP house line of clothing in their place.
Buy or sell J.C. Penney?
I still own shares of J.C. Penney because I believe, at these levels, the risk/reward profile is attractive.
But the company’s inconsistency and backtracking has me concerned. I like Johnson’s concept and believe it has real potential, but if management is unwilling to stick things out, the store could go nowhere fast.
Reintroducing coupons won’t be a magic bullet. As evidenced by Wal-Mart, the everyday low pricing model is a viable strategy, assuming the retailer is willing to establish trust with the consumer. But that takes time. What’s more, Kohl’s inability to capitalize on J.C. Penney’s weakness, despite having an aggressive discounting model, suggests there are other factors at work.
At this point, the company is too far gone to go back. J.C. Penney must stick it out and move forward with the transformation. Backtracking will do more harm than good.
