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Will J.C. Penney Company, Inc. (JCP) Find Its Feet in 2013?

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J.C. Penney Company Inc. (NYSE:JCP)After a disastrous 2012 performance, J.C. Penney Company, Inc. (NYSE:JCP) is in big trouble. More and more shoppers are avoiding J.C. Penney Company, Inc. (NYSE:JCP) stores these days, and management needs to reverse that trend quickly. J.C. Penney recently reintroduced discounts and coupons in an attempt to bring old customers back, but the early sales data is not encouraging. In fact, the company posted its worst performance of 2012 in the holiday quarter, despite running several promotions and sales. This news all bodes ill for J.C. Penney in 2013.

A disappointing year
In early 2012, CEO Ron Johnson’s team laid out a plan to “transform” J.C. Penney Company, Inc. (NYSE:JCP) for long-term success while also improving profit in the near term. The company got rid of most sales and coupons in favor of an “everyday low price” scheme, while working to bring in new brands that would be showcased in individual “shops” within J.C. Penney stores. Among the first shops to be introduced were an Izod store and a Levi’s denim bar.

A Levi’s Denim Bar at J.C. Penney, courtesy of J.C. Penney.

Many of these shops — including the Izod and Levi’s shops — have been quite successful since they made their debut last summer. But then it’s not surprising that clothing sells better when it’s presented in a fashionable and appealing way.

On the other hand, the company’s decision to do away with coupons and discounts alienated many longtime J.C. Penney customers who loved bargain-hunting. Moreover, the focus on a few shops left other vendors out in the cold. In other words, sales of Levi’s may have increased, but sales of Lee jeans plummeted at the same time.

J.C. Penney’s management expected the new “no-discounts” policy to cause some revenue losses, but executives believed that strong sales in the “shops” would offset much of the lost revenue elsewhere. Executives also planned to improve gross margin while cutting operating expenses by $900 million over the course of two years, thus leading to higher profits in 2012 and beyond. On the cost side of the ledger, J.C. Penney performed more or less as expected; the company achieved expense savings of more than $600 million last year, putting the company on track to reach $900 million in savings for 2013.

However, customer outrage was far worse than J.C. Penney Company, Inc. (NYSE:JCP) executives expected, leading to a 25% revenue drop. Meanwhile, a heavy reliance on clearances to sell merchandise damaged margins. The result: J.C. Penney Company, Inc. (NYSE:JCP) lost more than $1.5 billion before taxes last year, thereby falling short of management’s initial earnings target by a whopping $2 billion.

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