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.
About the author:
The Science of HittingI'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.