The biggest problem current facing Penney’s is that Johnson has tried to dictate consumer habits from the get-go. He did it at Target and Apple, and it worked. However, without his mini-shop platform in place before he changed the pricing strategy, he alienated many of Penney’s most loyal cost-conscious customers. Will those customers come back? Perhaps, if the price is right…
The pending litigation in New York between Macy’s and Penney’s over the right to sell Martha Stewart Living Omnimedia products does have some bearing, as the brand would be a major traffic driver into its stores. While a win here would not be single-handedly capable of saving Penney’s, it could be the impetus that drives alienated consumers back.
All told, I’m pretty convinced that Penney’s management team is a deer in the headlights. They seem completely lost as to what to do next, and I’m not sure the damage of its pricing practices can be reversed quick enough to stave off the inevitable. One thing I know for certain is that Penney’s can’t deal with another nearly $1 billion annual loss, so I’m recommending a call of underperform on the company.
Alex’s take
What else can I say about J.C. Penney’s abysmal performance that Sean hasn’t said already? Not much. What I can do is compare its performance to its peers with a few graphs:
JCP Revenue TTM data by YCharts.
Sears’ persistent weakness is well known and widely mocked, but Penney’s is worse. Shoppers are abandoning Penney (and Sears) in droves. Its consumer perception, according to YouGov’s BrandIndex, actually held up better than Sears’ did over the last holiday shopping season — but that was only good for eighth place out of 10 retailers. Target scored nearly twice as well on a ranking of retail values as Penney. Penney actually scored better than Macy’s on a BrandIndex “recommend” scale focusing on female shoppers around the same time frame, which indicates that Penney’s problems may actually be worse than they appear. It doesn’t much matter if women say they’ll recommend a store if: 1) they don’t actually recommend it, and 2) no one actually listens to these recommendations anyway.
When customers don’t come, it tends to be harder to keep a retailer in the black. Obvious conclusion, right? Well, Penney’s losses have increased at more than double the rate of its sales declines:
JCP Net Income TTM data by YCharts.
That’s not just a result of accounting (at least not in Penney’s case). No retailer has suffered a steeper decline in free cash flow over the past five years:
JCP Free Cash Flow TTM data by YCharts.
Sears might be a brand in slow decline. J.C. Penney is in free fall. Find me an example of a down-on-its-luck retail chain of Penney’s scope that managed a successful turnaround after consumer perception turned against it and I’ll show you 10 more that never recovered.
The plight of J.C. Penney in a world where Target is ascendant reminds me of a classic exchange from The Simpsons:
Marge: Well, I guess Macy’s and Gimbels learned to live side by side.
Agnes: Gimbels is gone, Marge, long gone. You’re Gimbels.
Gimbels was the largest department store company in the world at one point, but consumer perceptions changed. Ask Sears how that works. Even after merging with Kmart, Sears posted a real net revenue decline from the time it ended its catalog operation in 1993 to 2013. Now, go ask your female friends, neighbors, and relatives if any of them are planning to go shop at J.C. Penney anytime soon. I’d be surprised if you found any affirmative answers.
Short and sweet: No, sir, I don’t like it.
