On the edge: An updated look at J.C. Penney and Best Buy

The retail industry, yours truly included, has had a watchful eye on J.C. Penney ever since CEO Ron Johnson took over and announced his plans to revamp the iconic retailer. Many experts have shared their concerns over the new direction and, as the second quarter numbers would indicate, cause for concern is clearly warranted. With overall sales plummeting nearly $1 billion dollars, and earnings plunging from an expected $41 million profit to an $81 million loss, the company is down $1.7 billion in sales and $260 million in earnings in the first half of the year, compared to 2011. I don’t think this is what Johnson had in mind.

I’m not sure how much of this is just the inevitable growing pains associated with the process of implementing the new plan. I think this could be a case of “too much too soon.” A radical new pricing overhaul that was supposed to bring clarity has instead brought confusion, and customers have clearly not responded well to J.C. Penney’s attempt to eliminate the concept of sales and restructure their promotional offerings. Because they were having trouble communicating the new strategy to customers, Johnson has recently announced that they will do some backtracking. Among other things, they’re bringing back sales, which is probably a good start.

One thing the department store giant is not changing, however, is its plan to introduce a range of new and enticing aspirational and “best-in-class” brands as part of their long-term reboot. They’re bringing these retailers in as “stores-within-a-store.” The single most important thing that J.C. Penney can do right now, in my opinion, is focus on who their target audience really is. They have indicated they intend to appeal to a younger, hipper demographic. In theory, it’s exactly what J.C. Penney should be doing. I’ve always thought their audience is the same as Macy’s and Kohl’s, two stores, by the way, who have been good at engaging the younger customer and who also announced better-than-expected second quarter earnings.

It makes sense to me that a store that has traditionally skewed older wants to appeal to a younger demographic; after all, it’s a generation with spending power. It does feel to me, though, as if J.C. Penney is flailing around somewhat and trying to find their way while also trying to keep consumers interested during such a pivotal time — and that is a worrisome place for any retailer to be right now.

The first round of stores-within-a-store set to open in September includes names like Sephora, Mango (MNG), Martha Stewart, Izod, Carter’s, Maidenform, Vanity Fair, Liz Claiborne, Arizona, i Jeans by Buffalo and Levi’s. While a couple of those are not bad (MNG is definitely a hot brand), the overall “young and hip” impact strikes me as minimal. No one is going to mistake Martha Stewart for youthful and fresh anytime soon. That said, I don’t think all hope is lost — yet. While this first wave of new in-store brands is conspicuously lacking in fresh, young, hip names, the brands and designers they’ve mentioned for the second wave of in-store offerings slated for rollout in 2013, appear to be more interesting and appealing to that younger, hipper consumer. Included among the 40 shops that will come out next year are brands like Joe Fresh, Giggle, Cynthia Rowley, Michael Graves and Jonathan Adler.

The bottom line is that J.C. Penney is a big institution and an iconic brand; and, like any big ship, it will take some time to execute such a hard turn. Not only does it take time, of course, but a lot of money and hard work to make a change of this magnitude work. And there will likely be more painful quarters along the way. I worry that, if it takes too long and they experience several more quarters of loss, they may not be able to survive. I think the success of the new brands will be key to their survival, and so they will need to be proactive and aggressive in marketing those brands. While there is hope, I suspect that they will ultimately have to close some stores and reposition their real estate portfolio. But if they can consolidate and hold on to the best real estate for the next two to three years, J.C Penney just might be that revitalized brand Johnson is trying to create.

While the strategy might be inconsistent and a bit cumbersome to navigate, at least J.C. Penney is trying something different. Best Buy, on the other hand, seems to be teetering on the edge, and without some major changes soon, could be the category killer that killed itself. You’ve heard me say it before, but I’ll say it again: Best Buy Mobile has done well. And, while there has been some inventory repositioning, there are basically no indicators that the electronics retailer can survive long term with its current setup. They are saddled with large amounts of brick and mortar, and I don’t see that changing anytime soon. Just this week, they finally concluded their talks with co-founder Richard Schulze and rejected his offer to take them private, instead opting to hire Hubert Joly, turnaround expert and former head of global hospitality company Carlson, as their new CEO. Joly has a track record of successful turnarounds and growth in the media, technology and service sectors, but does not have experience in retail. It will be interesting to see what he can do for Best Buy.

I’ll continue to revisit J.C. Penney and Best Buy in future columns as more details of their long-term strategies emerge. Until then, I’d love to hear your thoughts on the troubles faced by these two retailers.

What do you think? Can J.C. Penney get back on track? Will Best Buy be able to do what it takes to reposition and survive? Please make a public comment below or feel free to e-mail me privately at jeff@jeffgreenpartners.com.

 Click here for past columns by Jeff Green.

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