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JCP - A Consumer Perspective
Posted by: The Science of Hitting (IP Logged)
Date: October 18, 2012 09:40AM

Last week, J.C. Penney (JCP) CEO Ron Johnson sent out an email that caught the media’s attention for the following three sentences:

“I’d like to invite you into your favorite jcpenney store to see the changes firsthand. As an incentive, I’m enclosing a $10 gift. Think of it as a thank-you from jcp for your loyalty throughout the years.”

The analysts following JCP are a smart bunch, and got right to asking the hard questions that will help them determine the viability of the company’s long-term strategy. For example, should the $10 be considered a coupon or a gift? (In case you can’t tell, I’m being facetious.) Here’s what an analyst at Deutsche Bank had to say in a note titled “$10 Off Is A Coupon In Our Book:"

“In our view, this serves as another admittance that the ["everyday low prices"] strategy transition continues to be difficult and on the heels of a month-long kids haircut giveaway in August, it shows that the management team is actually willing (and looking) for promotions that will aid the store draw traffic.

As we approach Black Friday and the Holiday period, we would not be surprised to see additional coupons and promotional events provided by JCP.”

Brian Sozzi, an analyst at NBG Productions, said the following: "It's a coupon rebranded… This tells me that the traffic problem continues."

As usual, I think the analyst community is asking the wrong questions (largely due to the fact that they’re only focused on near-term traffic – as indicated by Mr. Sozzi’s conclusion); I agree that this move is all about traffic, but think the conclusion misses the forest for the trees: Does anybody really think that this $10 “incentive” – whatever you like to call it – is what management was targeting when they announced their plans for the future? Is this in any way comparable to what “coupon” meant in the J.C. Penney of two years ago, the increasingly promotional environmental that I’ve discussed in previous articles?

The answer is no; the target was endless hours wasted by employees switching in-store signage rather than focusing on providing quality service to the customer. And I don’t think that vision has changed at all (in the recent words of Johnson: “We are always going to tweak the tactics, but we won't change the vision”).

While I’m not interested in the debate about whether this is a gift or a coupon (that discussion is the definition of noise), I am interested in the status of the transformation. As such, I felt it was a good time to revisit the stores to talk with employees about the changes they are seeing, and to look at the story from the perspective of your average consumer.

I spent a good hour walking through the local JCP, and spent time looking at merchandise and watching other consumers, as well as talking with associates. On the first part, I have a couple observations that other investors might be interested in (or have shared on their own store visits):

1. The shops stand out. The design and lighting in the shop sections is noticeably different than in the remainder of the store, and the layout certainly looks much less cluttered and higher quality. However, from what I saw (remember, all of this is anecdotal, and any observations should be considered in that context), these sections were not any busier than the other sections on average.

2. Your average Penney’s is very, very big. As the company has noted, most stores will have 100 shops upon completion, meaning that there’s still a long way to go with roughly 6 shops per store at this point. When I walked through the store, this was apparent: So much of what I saw looked unchanged, which likely explains why the response by some consumers (people unfamiliar with the long-term vision) who have visited the stores and expected a big change hasn’t been too positive. I think this is a critical problem that the company is facing, and will continue to face – the balance between maintaining a decent level of traffic (which means still having people show up, likely through promotional events like free haircuts or $10) and actually getting to the point where broad change becomes apparent will be a long and rocky road. And my impression is that it will take more than a few shops (25 or so) to overcome this issue.

3. The company sells a lot of items that seem out of place. Once I got out of the apparel sections and into the areas selling kitchen appliances and home goods, I noticed that a lot of the products being sold didn’t really mesh with what I envision as the future of JCP. A great example of this was a rack of 50 to 100 boxes of K-cups and Nespresso pods. I simply cannot imagine who comes to Penney’s to load up capsules for their single-serve coffee machine (and after looking at the rapidly approaching expiration date on many of the boxes, the answer might be that not many people do). Thinking about the strategy as presented by Johnson, it is about product quality, with a focus on differentiated experiences and offerings. What the company will do in sections like kitchen to eliminate the plethora of cheap appliances and other trinkets that have no real place in the store and face direct competition with the Walmarts (WMT) and Amazons (AMZN) of the world is still a bit unclear to me.

4. Clearance is popular. Among the busiest sections I found in the store were the clearance racks; many of the people in these sections are what I would describe as your typical Penney’s shopper. I think the target consumer won’t be a frequent guest in the store until the company seriously boosts the marketing spend, and I think letting off the gas for the time being is the right call. As noted above, you risk alienating potential customers for a long time if they show up with expectations of revolutionary change, only to find the same old JCP they’ve always assumed was there (the one their parents dragged them through as a kid for us younger folks).

The Employee Perspective

Besides my own experience, I made an effort to talk with associates about the change; all of the people I talked to recognized that change was underway, but some admitted that they didn’t have a clear vision of the end goal, which I think (if it’s a result of inadequate communication) is a major error on the part of management. When I asked above traffic, the general response was that it was so-so, with no indication that it had changed in a big way over the past few months.

Despite what some people might assume, the older associates actually appeared the most interested in the change (of the people I spoke with). Maybe they are simply the most concerned about keeping their jobs in this economic environment, but my impression was that they were genuinely excited about the new direction. And many of them were walking around greeting customers and actively engaging in customer services, rather than changing out clearance signs.

Overall, I would conclude with the following: My impression is that this transformation will not only take years to be completed, but that the rebound in the financials may be delayed for longer than many people assume. As an investor (and someone interested in adding to my holding at the right price), I would be very cautious when entering a position (demand a sizable margin of safety to account for the length of time between value and price convergence, and the inherent uncertainty in the changes proposed). Let the irrationality volatility of the market provide you with opportunities as opposed to looking to its gyrations as an indication of success or failure.

Again, as I noted above, this is anecdotal, and should all be taken with a grain of salt. I would love to hear the opinions of others who have recently visited a JCP location if they are willing to share their thoughts. I will update readers on the financials after the next conference call.


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JCP - A Consumer Perspective
Posted by: nikhilindya (IP Logged)
Date: October 18, 2012 10:32AM

I recently visited a JCP store and actually ended up buying a shirt. (my 1st ever! at JCP) . That being said, the overall mood at the store was gloomy to say the least. Escalators under repair ( or may be that's because of the change that's underway.) I did see the new lighting and that was good.
My overall impression was, its not there yet.


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JCP - A Consumer Perspective
Posted by: rafaelscremin@google (IP Logged)
Date: October 18, 2012 12:41PM

I visited a JCP store too, and I saw positive changes. I think that the transformacion will be a great success, I like the idea and a lot of customers are visiting the store for the first time
.


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JCP - A Consumer Perspective
Posted by: The Science of Hitting (IP Logged)
Date: October 18, 2012 06:20PM

Nikhilindya and Rafaelscremin,

Thanks for the interesting perspectives on the JCP transition.


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JCP - A Consumer Perspective
Posted by: tonyg34 (IP Logged)
Date: October 19, 2012 08:56AM

Didn't we play this game at Sear's back in 06 ? - retail is all about margins and JCP simply can't compete with AMZN or industry loss leader COST


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JCP - A Consumer Perspective
Posted by: ttony (IP Logged)
Date: October 20, 2012 03:21PM

JCP is absolutely nothing like Sears. JCP is attempting to add a completely new category to the department store mix. That transformation will take time but the payoff could be extremely large. But it will take patience. Just the technology change will take three years. JC Penny had 500 custom software programs so that 95% of their technology spend each year was for maintenance. This will change.

A year from this Xmas they expect only 40% of their base 700 stores to have been changed to their new format. Their buyers will have to adjust to a completely new experience. Inventory will be much less. But when it is accomplished, bumps along the road and all, what will we have? A new shopping experience for the customer. Technology will make their shopping easier; both in fit and in check out. Instead of horizontal tables piled with messy stacks, they will see vertical displays. Instead of endless racks they will have aisles of separate stores-each a different shopping experience. That is the core of the idea...duplicate the mall in one store.
They say that each mall shopper traditionally visits about five stores per visit. In the completed JCP stores...maybe three years....a consumer can easily visit 25 in the same period. And those stores will be fresh because JCP will be able to offer new and very different vendors to the consumer. Many of these vendors would not otherwise have representation in the mall. If you are a wonderful small vendor with limited representation across the country why wouldn't you want to immediately have access to 700 stores across the country in YOUR OWN SPACE. The vendor will have much more control how his wares are shown. The trade off is that he has to agree to hold his prices down as JCP wants to continue to offer low prices. But since the vendor does not have to rent space, etc. as a stand alone store, he can afford to lower his prices.

The payoff for JCP down the road is much lower costs; they have already shown that they are far along of their initial target of a $900 million reduction in overhead. Less inventory and better use of technology will also lower costs. But the big payoff should, HOPEFULLY, be a much higher sales per square foot for them. Moving from the traditional department store range toward the specialty store range. Folks....that is big money.

Yes we have the transformation to go through. But watch closely how the media reacts to each announcement. They are negative as they are mostly negative about just about anything new. When JCP flubbed their initial marketing, the media/analysts crushed the stock. When Johnson fired the head of marketing, the media/analysts crushed the stock. But while acknowledging that the mistakes were made, I was thrilled that Johnson acted so decisively so quickly. And then rather than trying to spend his way out of the muddle with ad dollars, he cancelled all ad spending to think it over. That is a wow...no panic...again such a wow.

And now they have a traffic problem so they offer a ten dollar coupon to get people into the stores. The media goes crazy saying that JC Penny is reversing its policy of no coupons/sales, etc. But it is a smart ad spend as they want to show their new layout and ten dollars per customer is smart. It does not require that endless employees retag stuff.

The market is pricing this stock at its current price because:
1. Thinking of the failure of Sears
2. The Ellen problem...lots of shoppers didn't like a gay representative.
3. Confusion over the change over in pricing..bad initial pricing.
4. Firing of the marketing guy.
5. 20% drop in sales.

But what we have is an extremely smart owner-Ackman, and a brilliant manager-Johnson. They will correct the mistakes as they go. They are extraordinarily proven people. Read the Jobs bio....how does someone survive that sort of leadership? They survive by being astounding good at their job. Johnson is that.

What is the company worth? Well the market was pricing the stock higher when it had 20% more crappy sales with $900 million more overhead and a down trending future.
This is a honey of a story for an investor who has a three year horizon..


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JCP - A Consumer Perspective
Posted by: ttony (IP Logged)
Date: October 20, 2012 03:39PM

One other thought....totally agree with you on the home department...it sucks...it is the old JC Penny. But Johnson can only do so much so fast. This is such a big job and I sense he is concentrating on the main task which is the initial 40 shops in the 700 big stores, overall presentation in the stores, inventory control, and technology. Things like the home section, the 400 smaller stores and the online business will have to wait their turn. Too much to do to try to solve everything at once.


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JCP - A Consumer Perspective
Posted by: tonyg34 (IP Logged)
Date: October 21, 2012 07:16PM

still sounds like sears

they tried the store in a store concept - craftsmen, home and garden, lands end - no one cared

"extremely smart owner" Ackman = Lampert

you can't "correct the mistakes as you go along" b/c when "brilliant" mngrs get involved in lousy businesses, its the reputation of the business that prevails

maybe you can fall back on the real estate portfolio or an expanding online sales presence, cause that has worked before too


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JCP - A Consumer Perspective
Posted by: The Science of Hitting (IP Logged)
Date: October 22, 2012 04:32PM

Interesting comments - thanks everybody!


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JCP - A Consumer Perspective
Posted by: varunfriend (IP Logged)
Date: November 12, 2012 08:26PM


What is the real estate book value of JCP? ie at what price does it become an asset play with the business for free?


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