JCPenney: Still Doin’ It Right?

On April 14, 2012, JCPenney celebrated its 110th birthday. With 1,100 stores in 49 states, it remains a symbol of “Middle American retailing,” despite several years of hard times and declining sales and profits. Revenues plunged from $20 billion in 2006 to $17 billion last year as The Great Recession took a heavy toll on the core Penney working family customer.

In late 2011, the board hired Ron Johnson, the former head of Apple retail stores and the guy who invented their Genius Bar, to lead the venerable department store merchant into the next phase of its life cycle and to restore it to its former glory.

To gain perspective on where Penney is going, it’s important to understand where it came from.

His Middle Name Was Cash. In 1902, James Cash Penney opened a clothing store called Golden Rule in the small mining town of Kemmerer, Wyoming. Two things made the store stand out. Each item was clearly marked with the one price that was charged to everyone, a practice virtually unheard of in those days. Also, the young Penney accepted only cash, a policy which cohorts advised him against, since most stores had to extend credit to their customers to entice them to buy. His concept apparently worked: the first year’s profits were $8,500 on sales of $429K! By the end of 1929, Penney had 1,400 stores on small town Main Streets in all 48 states. The company moved into vertical integration and private brands, and relocated head-quarters from Salt Lake City to New York City. During the Thirties, the company began the trend toward big city stores in downtown locations.

The Suburban Life. In 1949, the company’s first mall store was opened outside St. Louis, a move which heralded the mass exodus of consumers and retailers to the suburbs. Post-WWII America was an era of big business and mass markets, and JCPenney was the store of choice for millions of Americans. Sales grew from $680 million in 1945 to $2 billion (1,700 stores) in 1964, and in 1962 got into the mail order business. By the Seventies, JCPenney had become the stalwart anchor for many of the new regional shopping malls popping up across the country. In 1978 sales reached $10.8 billion.

The Eighties and EDI. By 1983, however, when the company became the sole source of designer apparel from Mary McFadden and Halston, it was considered the kiss of death for those couturiers. Penney had become mainstream in an era when department stores reigned over the upscale business. The company moved its headquarters from New York City to the suburb of Dallas known as Plano (some of the disgruntled transferees called it “Drano”) where it remains today. At about the same time, consumers started trading up in their apparel, preferring department and specialty stores to the plain vanilla of the mid-tier national chain department stores. As a result, Penney had to reposition and restructure its business to preserve profitability. The company spent over $1 billion modernizing its stores. It dedicated a tremendous amount of resources to EDI, or Electronic Data Interchange, which helped boost efficiencies and the bottom line even in light of low topline growth. Since many department store brands would not sell to JCPenney, the company beefed up its private label branding programs, in the process fortifying the entire JCPenney brand proposition. Arizona, St. John’s Bay and Worthington remain major apparel brands today, thanks to the investment made in the past two decades. These private brands join key classification brands such as Haggar, Levi’s, VanityFair, Lee, Dockers and others. In the mid-80s the tagline and jingle “JCPenney: Doing It Right” pervaded the airwaves. The company was ahead of its time with technology and private branding. It was, in fact, doing it right long before others caught on. By the late 80s, sales had reached almost $15 billion, but competition from specialty chains and department stores made earnings growth spotty, a situation that has persisted for over two decades, it seems.

Recent Initiatives. For the past several years Penney has focused on a target customer with an income of between $30K and $80K. This group includes teens, Hispanics and young families or “Starting Outs.” Penney’s mission has been to sell them fashion at value prices. Its day in-day-out commitment to value does not just involve price, but also extends to quality, selection, fashion and service. Unfortunately, these customers were hardest hit of all during the recent economic turmoil, and had to curtail discretionary spending.

In the past decade, sales grew from $17.5 billion to $20 billion, but have since declined.

Gross margins fell from 2005 to 2008 as the highly promotional environment brought on by the recession required deep discounting and week-in, week-out sales. Margins rose in 2009, but so did SG&A expense as the company invested in centralized buying, revamping merchandise and stores to better appeal to its target consumer, upgrading of brands, and centralized checkouts in some stores. The company has launched MNG by Mango, put Sephora shops in the department stores, launched Aldo “Call It Spring” footwear, and bought the Liz Claiborne brand. Under CEO Mike Ullman, Penney strived to re-establish an emotional connection with its customers.

Unfortunately, this has not done enough to stem the erosion of its market share from both above and below. Last year, gross margins took a big hit as JCPenney transitioned to JCP and in the process cleared out merchandise from 400 brands, many of which will no longer be carried by the retailer.

Department stores have the upscale brands and the loyalty of the older consumer. They’re in heavy promotion mode these days, so are offering their own version of value. Discounters are continually introducing new brands, and are perceived as offering the lowest prices and the convenience of one-stop shopping. Elsewhere, specialty chains are attracting a younger, more fashion-oriented consumer. The initiatives of Ullman – and Allen Questrom before him – helped, but were not enough to take Penney through what many are calling a complete transformation of the retail industry.  

The Ron Johnson Era Begins There is lots of speculation about what JCP, as it’s now called, will become. It is clear that Johnson was given the charge to create a clear and unique positioning for its product and service offering, and the buzz has  already resulted in more “ink” dedicated to JCP in the last two months than in the previous three years combined. The company has a new name (JCP) and American flag-like logo. At the end of January a complete revamping of the company’s pricing strategy from high-low to everyday low was announced, which will involve elimination of coupons, the decline from 590 promotions per year to 12, and the creation of clearance sales on the first and third Friday of every month to coincide with typical paydays. When you think about it, it’s a return to the original Golden Rule pricing strategy that JC Penney himself devised. Also planned are: a drastic reduction in headquarters headcount; the shedding of three-quarters of the retailer’s brands; new deals with designer Nanette Lepore and domestic doyenne Martha Stewart, among others; and a new ad campaign with Ellen Degeneres as company spokesperson. The final phase of the transformation will involve a total revamping of the stores themselves into enclosed mini-malls with in-store shops, Town Squares with food, events and other happenings. The company’s stock soared for several weeks after the big announcement, but has since faltered as news of confused customers, soft sales, and success at its competitors has surfaced.

Will The Plan Ultimately Work? Although it’s still way too soon to tell whether JCP will regain momentum, take share back from the likes of Kohl’s, Macy’s, Walmart, Target and the specialty chains, and become, once again, America’s Favorite Store, the pundits are lined up on both sides of the question. Many feel that the American consumer is so addicted to discounting that it will take more than pretty new stores and streamlined marketing materials to get them to kick the habit. Others maintain that the initiatives are gutsy, and a breath of fresh air and, judging from what Johnson accomplished at Apple from a sheet of blank paper, Mrs. Johnson didn’t raise any dumb sons. The JCPenney board, including activist investor Bill Ackman, who purchased a big stake in the company last year, seems to be willing to give Johnson all the time and resources he needs to effect the turnaround. Johnson’s total Penney compensation package last year was a reported $53 million.

Arizona jeans and the department store environment are a far cry from iPads and the cool world of the late, great Steve Jobs. But anything that restores excitement to the process of department store shopping would be a welcome development, indeed.

Good luck, Ron Johnson, and keep us posted!