I’ve been following the transformation at J.C. Penney (JCP) very closely. It’s an interesting example of a variety of market biases. There are the sentiment changes that have caused huge swings in the stock price. It also shows the short term-nature of Wall Street and the disregard for expense cutting by investors. Retail investors focus on same-store sales and have totally disregarded what in my opinion seem to be very logical expected results coming next year. Even if these results don’t come, there is ample downside protection from the cost cutting already done.
I’m not going to rehash the JCP story, but I do want to give some highlights to CEO Ron Johnson’s presentation this morning at the Piper Jaffray Consumer Conference. If you’d like more background first, take a look at these articles:
This morning Johnson gave a 20-minute pitch and then took some questions. Here are some highlights.
“For J.C. Penney, the promotional strategy had run its course.”
Over a ten-year period from 2002 to 2012, the average discount to get a customer to buy a product from J.C. Penney went up from 38% to 60%. This was accompanied by an increase of private label products, which were largely undifferentiated from their competitors. The mix of heavy promotion (590 promotional events per year!) and undifferentiated, private label products destroyed price integrity. Johnson said it was the same situation that occurred at Mervyn's, and it simply was unsustainable.
The company had to change the pricing model immediately for two primary reasons: They couldn’t cut costs if they didn’t cut all the wasted time and money spent on doing all of these promotions. They also couldn’t attract the brands they wanted without having stable pricing.
The result of this is that they’re ahead of schedule with expense cuts by one year. And, they’ve attracted a plethora of new brands. These two things will pay large dividends in the coming quarters.
“One year of sales going down that sets the stage for a year of take-off”
The team at J.C. Penney committed to one year of transformation to “get to the other side,” as Johnson said it. They determined that the balance sheet was strong enough to handle the change and they went for it. Now, they are beginning the process of having “amazing products, great brands, great presentation, great service.”
Johnsons didn’t sugarcoat the sales drop-off. He said sales were tougher than what they expected, but the benefits were better than what they thought as well, with the ability to cut expenses faster. However, “The pricing change has been kind of confusing for the customer and it’s been harder than expected.”
JCP will do a better job of communicating the change and customers will better understand as the year goes on. I’ve already seen this in some blog posts and other commentary on an anecdotal level.
“When I was at Target (TGT) we started with 40% in promotions in the home area in 1995. When I left in 2000, it was 3%.”
Weaning customers off these heavy promotions has been down in the past, as Johnson’s reference to his time at Target indicates. The average purchase increases and the sales per square foot rises substantially. Most importantly, the customer will once again come to trust the retailer. That’s J.C. Penney’s goal.
To listen to the webcast, please click here.
Disclosure: Long JCP
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