No solution?
It’s bad enough that so many customers deserted J.C. Penney Company, Inc. (NYSE:JCP) last year, leading to the big loss. However, it’s even more troubling that none of the company’s attempts to fix things worked. For the first half of the year, J.C. Penney’s sales dropped by 21.3%, a result that CEO Ron Johnson called “softer than anticipated.” However, many investors expected the late summer launch of the “shops” featuring Levi’s, Izod, Liz Claiborne, and other major brands to revive sales. Instead, J.C. Penney took a turn for the worse: Revenue declined 26.6% in the following quarter. While many of the shops have done well individually, they have apparently achieved their sales gains at the expense of the rest of the store.
Then the company reintroduced various promotions to try to bring customers back to the stores. J.C. Penney Company, Inc. (NYSE:JCP) offered free children’s haircuts during the back-to-school season, held a big Black Friday sale and a friends-and-family event during the holiday season, and offered customers “free gifts” (essentially $10 coupons) on more than one occasion. These tactics also failed: The company’s Q4 performance
was the worst of the year, with revenue down more than 28%. By the end of 2012, revenue was down nearly 35% from J.C. Penney’s peak.
J.C. Penney 5-Year Revenue Chart. Data by YCharts
Thus far, opening popular brand shops within J.C. Penney stores and reintroducing discounts have not brought J.C. Penney out of its nosedive. That’s why I think the planned reintroduction of regular sales events in 2013 may not bring back profits at J.C. Penney.
Transformation on hold?
J.C. Penney has been running through cash at an alarming rate recently. While the company ended 2012 with nearly $1 billion in the bank, it had negative free cash flow of roughly $1.3 billion in the first nine months of 2012. In other words, at last year’s rate, J.C. Penney could run out of cash by this fall. To save money, J.C. Penney Company, Inc. (NYSE:JCP) may be forced to slow or stop the rollout of new brand shops before then. Building out dozens of shops in each of J.C. Penney’s 700 largest stores obviously requires a significant upfront investment. Indeed, the company’s CFO suggested last fall that the company will stop opening new shops if it’s short of cash.
However, that would leave the stores stuck in limbo, with about 30% of the floor broken up into shops, and the rest in a traditional department-store format. A mixed layout like that would probably be confusing to customers, which could further alienate them from the J.C. Penney brand. J.C. Penney Company, Inc. (NYSE:JCP) thus faces a Catch-22: It needs to be profitable to pay for the continued rollout of new shops, but it needs to complete the shops’ rollout to present a clear message to consumers and thereby return to profitability.
Conclusion
Management is unlikely to escape from this dilemma. J.C. Penney Company, Inc. (NYSE:JCP) is opening several new shops this month, in the hope that (along with a return to discounting) it will be enough to reignite sales growth. Given that similar moves in 2012 failed to bring customers back, this plan does not inspire much confidence. This is shaping up to be another rough year for J.C. Penney.
The article Will J.C. Penney Find Its Feet in 2013? originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg owns shares of Apple. The Motley Fool recommends and owns shares of Apple.
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