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Steven Kiel
Steven Kiel
Articles (136)  | Author's Website |

Highlights of J.C. Penney’s (JCP) Presentation at the Piper Jaffray Consumer Conference

June 05, 2012 | About:

I’ve been following the transformation at J.C. Penney (NYSE: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:

Value Investing and J.C. Penney

Think Big: Bill Ackman's Presentation on the Renaissance of JC Penney

Looking Past Investment Day Euphoria: The Long Case for J.C. Penney

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 (NYSE: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

About the author:

Rating: 4.4/5 (14 votes)


Radioheadok311 - 4 years ago    Report SPAM
One of the questions I was kicking around with fellow classmates is "why did JCP roll out the new price and transformation before remodeling the majority of its stores?" I think this is an interesting question, some people were expecting a much different experience due to the ads and received the same store layout as before. I think that is a problem, hopefully short-lived, but a problem nonetheless.

Another question I have is: Is JCP trying to shift the demographics it caters to? i.e. shifting away from bargain hunters to more fashion-forward consumers? If so, then we shouldn't be too surprised by the most recent results.
Slkiel - 4 years ago    Report SPAM
They rolled out the new pricing system first for two reasons: That allowed them to begin cutting expenses immediately (It turns out it costs hundreds of millions of dollars to constantly be putting on sales), and it allowed them to immediately begin reaching out to better brands that didn't want to be associated with constant discounts. That has also paid dividends as many of these new brands are launching before the back to school season and later this fall.

To you second question, I think you're right. Slightly more well-heeled shoppers means a bit more spending per customer. That increases the sales per square foot, which is the key. The better brands will attract the more affluent shopper. That will take time to reset, but there has been anecdotal evidence that these types of customers are beginning to notice.
Radioheadok311 - 4 years ago    Report SPAM
Your first point is interesting. Can we view this is a two-pronged approach, then?

1) Cut bloated cost structure (corporate inefficiency and the aforementioned cost of re-pricing) to staunch bleeding from 6-12 months of horrible SSS.

2) Bring in the new brands and increase sales per sq. ft once newly targeted consumer takes notice; likely a 1-2 year process

Result = op. leverage and increasing SSS in years 2-3

Likely going to require some intestinal fortitude to deal with the hiccups, but seems like a fantastic opportunity for the long-term investor (if there are any left in existence). The alternative for JCP was a slow-to-rapid death, so I suppose shareholders, and employees should be excited.
Slkiel - 4 years ago    Report SPAM
Yep, I agree on the intestinal fortitude as well. The new team and Ackman appear to have it.
Cogitator99 - 4 years ago    Report SPAM
Steven, what are your thoughts on the latest Q?

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