What to Change: Merchandise or Merchandising? J.C. Penney Company, Inc. (JCP) and More

When retail businesses are not doing well, they normally head on to bring a change in the merchandise or the merchandising. Where merchandise is the variety of collection being offered at the stores, merchandising is the way those goods/services are presented to the customers. Given limited budgets in recessionary times, firms normally have the option to bring a change in only one of them. However, this decision is absolutely crucial for the future of that company. In order to understand how disastrous a wrong strategy can be and how fruitful going in the right direction can be, you will have to read the following:

J.C. Penney Company, Inc. (NYSE:JCP) vs. Dillard’s, Inc. (NYSE:DDS)

Throughout 2012 as JC Penney embarked on its transformation, the company’s management placed a significant emphasis on the merchandising of products and the in-store experience instead of focusing on key in-demand merchandise categories (such as footwear, accessories, and beauty), or defending its home business. The reasoning behind management’s focus on the store environment was the idea that e-commerce has made the physical shopping experience much more important. In theory, it sounded like a good plan: Shop-in-shops among coffee bars, free Wi-Fi, LEGO pits for kids and comfortable seating areas would result in a great time for the shopper in the hopes of driving traffic and keeping the customer lingering. However, since JC Penney embarked on its massive project of revamping most of its store base, traffic has been down significantly and sales have been down even more so. To be fair, most of the aforementioned amenities have not yet been installed in the stores, but the physical change of the stores to shop-in-shops has been quite evident, and the merchandising of the products has changed drastically. What the company has done so far to change the store base has resulted in worse than expected sales and declining traffic.

JC Penney’s turnaround lies in stark contrast to Dillard’s, a very successful turnaround effort. For most of the mid-2000’s, there was no question that Dillard’s was struggling, reporting quarter after quarter of negative comp store sales and clearly in need of a change. As a result, beginning in mid-2000’s, the company began executing a shift in strategy which involved making subtle, yet effective refinements to its business. These included closing underperforming stores, slowly bringing in top brands and altering its merchandise mix with a focus on key categories that resonate with its core customer base (i.e. “FAB”). Notably, Dillard’s turnaround did not involve large CapEx spend or significant physical changes to the stores. After making these strategic refinements, Dillard’s began to reap the benefits. Not only has comp store sales growth exceeded market expectations, but the company has reported record earnings growth, all of which benefit its share price.

While Dillard’s changes to its business were more subtle, they were effective and involved making refinements that were not severely disruptive to the business. Among other drastic changes, JC Penney has completely altered its merchandising in an attempt to draw in a new, younger customer, but in doing so, has put product into the stores that do not resonate with its core customer. The company has abandoned portions of its core business, including St. John’s Bay and its home business. These segments received little advertising and merchandising support all year in spite of their historically high share of sales. Put simply, the company has attempted to do too much at one time in an effort to completely change its business and customer. The result thus far has been a decline in comp store sales, earnings and share price that is far greater than anyone could have reasonably anticipated.

A Shy at Target Corporation (NYSE:TGT)

Target is another supreme example of a retailer who is continuously facing challenges with respect to its merchandise focus. One recent example of a merchandise misstep was when the company rolled out its special Holiday selection in conjunction with Neiman Marcus in late 2012. The price points of the products offered and seemingly fragmented selection of merchandise categories clearly did not resonate with the Target customer. As a result, the rollout was not as impactful as initially hoped. Target reported flat same store sales for the month of December, and the merchandise selection was later marked down as much as 70% off.

Foolish Bottom Line

Through the help of examples, we can see how different stocks can become nightmares for investors just because of a step taken in the wrong direction.

The article What to Change: Merchandise or Merchandising? originally appeared on Fool.com and is written by Masam Abbas.

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