On Monday evening, J.C. Penney Company, Inc. (NYSE:JCP) CEO Ron Johnson told the Associated Press that his company would reintroduce some sales this year, particularly around holiday events. Investors greeted the news with relief, sending the stock as much as 10% higher on Tuesday. The move to reintroduce sales is probably a good decision. However, bringing back sales is not guaranteed to return J.C. Penney to profitability. Accordingly, investors should wait to see tangible signs of a turnaround before buying the stock.
The background Last year, J.C. Penney Company, Inc. (NYSE:JCP) controversially eliminated most sales and coupons in an attempt to simplify operations and improve the company's profit margin. However, the elimination of discounts was a disaster. Through the first three quarters of fiscal year 2012, revenue was down 23% to $9.1 billion, while the company's GAAP loss widened from $0.30 per share to $1.98 per share. On an adjusted basis, EPS for the first three quarters dropped from $0.73 to negative $1.55. Analysts currently expect another dreadful performance in the fourth quarter, with revenue down more than 23% even though the quarter has an extra week compared to last year!
This rapid deterioration of operating results was unprecedented in the retail industry. While Ron Johnson understood that a sudden change in pricing strategy could alienate some customers, he believed that most customers could see through the "gimmicky" nature of markups and markdowns in the retail industry. Instead, customers abandoned J.C. Penney in favor of competitors like Macy's, Inc. (NYSE:M) and Dillard's, Inc. (NYSE:DDS) that maintained a promotional stance while offering high-quality merchandise. These competitors managed to post 3% to 4% same-store sales growth in spite of a weak retail spending environment by taking share from J.C. Penney.
A shift foreshadowed J.C. Penney returned to moderate promotional behavior in the past few months. During the back-to-school period, the retailer offered free children's haircuts in its salons. This promotion returned during the holiday season, along with a $10 "gift" to entice customers into the stores, a friends-and-family discount day, a Black Friday sale, and other promotional events.
J.C. Penney's management studiously avoided referencing "sales" or "coupons" while communicating about these events. Nevertheless, J.C. Penney had clearly begun a move back toward the promotional model before this week's announcement.