Another Sign J.C. Penney Company, Inc. (JCP)’s Turnaround is Floundering

I own shares of J.C. Penney Company, Inc. (NYSE:JCP), but after Wednesday’s news, I’m seriously considering selling my stake. According to Reuters, the retailer will increase prices on its clothes, only to later mark them down — a strategy the company used to employ before CEO Ron Johnson took the helm in 2011. Evidently, management believes this strategy will help lure discouraged shoppers back to its stores.

J.C. Penney Company, Inc. (NYSE:JCP)

Ron Johnson’s turnaround strategy has floundered

It’s no secret that Ron Johnson has been having a difficult time at J.C. Penney. On Feb. 27, the company reported a quarter some have characterized as the worst in retail history. Year-over-year, same-store sales dropped by nearly a third, while the company posted a loss of almost $1 billion.

Many have blamed J.C. Penney Company, Inc. (NYSE:JCP)’s problems on Johnson’s decision to embrace a strategy of “everyday low prices” — consistent, low pricing; no coupons or discounts.

Most retailers use discounting as a way to bring customers into the store. (Just yesterday, I received an email from Express, Inc. (NYSE:EXPR) urging me to come into the store, informing me that everything had been marked down by 40%.) By eliminating discounting, the impetus to shop is likewise eliminated.

Can everyday low pricing work?

That said, everyday low pricing can work: Wal-Mart Stores, Inc. (NYSE:WMT) is proof of that. In fact, the words “everyday low prices” are practically synonymous with the company, the world’s largest retailer. If it works for Wal-Mart, why can’t it work for J.C. Penney Company, Inc. (NYSE:JCP)?

Some might argue that Wal-Mart is primarily a grocery store chain with a large selection of other goods, and that when it comes to selling clothes, everyday low pricing can’t work. While it’s true Wal-Mart does rely primarily on grocery sales, the company does have a solid apparel operation. What’s more, on the company’s last earnings call, management cited apparel as a growth area.

Of course, Wal-Mart has stuck to this strategy for years. Consumers feel confident that when they go into a Wal-Mart, they truly are getting the lowest prices — no coupons necessary. Building that sort of image takes time.

Today, virtually no one questions Wal-Mart’s pricing strategy, even bears. Instead, Wal-Mart is seen as a direct play on the consumer: when JPMorgan downgraded Wal-Mart last month, analysts cited the payroll tax increase — not the company’s prices as reasons to be bearish on the stock.

Surprisingly, Kohl’s has not benefitted from J.C. Penney’s demise

Some investors might have assumed that competitor Kohl’s Corporation (NYSE:KSS) was poised to gain from J.C. Penney Company, Inc. (NYSE:JCP)’s decline. The retailers operate in a similar market niche and generally sell similar product.

Yet, Kohl’s has been unable to capitalize on J.C. Penney’s mistakes, despite leaving its own strategy the same. Over the last year, shares of Kohl’s are down nearly 13%. That’s better than J.C. Penney’s performance, as its shares are down about 60% over the same time span, but still significantly worse than the broader S&P 500.

In a note released last week, analysts at Morgan Stanley downgraded Kohl’s to Underweight, citing economic factors like the payroll tax increase. But interestingly, Morgan Stanley also cited renewed competition from J.C. Penney Company, Inc. (NYSE:JCP), with the return of its discounting strategy.

Maybe everyday low prices aren’t to blame

Lost in all this is the possibility that the lack of discounts are not to blame for J.C. Penney Company, Inc. (NYSE:JCP)’s current state. It seems as if everyone has just blindly accepted the loss of discounting as the key driver for the company’s ills, and not considered other factors.

There are a number of other reasons J.C. Penney’s same-store sales could’ve fallen. In addition to ditching everyday low prices, management changed the company’s advertising, remodeled stores, and changed its clothing brands.

On the company’s last earnings call, Johnson declared that “our marketing didn’t connect very well with our customers last year.” Until Michael Francis was fired from J.C. Penney last June, the company undertook a progressive advertising campaign, including a father’s day ad thatdrew calls for a boycott from an anti-gay group.

J.C. Penney has been remodeling its stores, and while they do look cleaner and more organized, the stores have had their general image changed, with a new logo and eclectic background music. Those subtle atmospheric changes could alienate consumers who have shopped at a familiar store for decades.

Then of course, there’s the changing product. As J.C. Penney has introduced its new store within a store concept, its naturally led to less floor space for traditional J.C. Penney brands. The company has also shifted some of these brands, introducing a new JCP house line of clothing in their place.

Buy or sell J.C. Penney?

I still own shares of J.C. Penney because I believe, at these levels, the risk/reward profile is attractive.

But the company’s inconsistency and backtracking has me concerned. I like Johnson’s concept and believe it has real potential, but if management is unwilling to stick things out, the store could go nowhere fast.

Reintroducing coupons won’t be a magic bullet. As evidenced by Wal-Mart, the everyday low pricing model is a viable strategy, assuming the retailer is willing to establish trust with the consumer. But that takes time. What’s more, Kohl’s inability to capitalize on J.C. Penney’s weakness, despite having an aggressive discounting model, suggests there are other factors at work.

At this point, the company is too far gone to go back. J.C. Penney must stick it out and move forward with the transformation. Backtracking will do more harm than good.

Joe Kurtz owns shares of JC Penney. The Motley Fool has no position in any of the stocks mentioned.
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

The 10 Most Deadly Diseases in the World Today

The 5 Most Expensive Luxury Motorhomes in the World

20 Largest Stock Exchanges in the World

6 Richest Painters In The World 2014

The 6 Countries with the Best Hospitals In The World

10 Largest Beer Brewing Companies in the World

The 10 Richest Fitness Gurus In the World to Pump You Up

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!