Is Time on Penney’s Side?

Does J.C. Penney have time on its side? Or to put it another way: How long will investors wait for J.C. Penney’s transformation? Because, based on the chain’s awful first quarter, it doesn’t appear to have even taken root yet. I’m not surprised.

To me, the most telling detail in Penney’s first quarter was the 18.9% drop in same-store sales and 20% decline in traffic. Sure, CEO Ron Johnson might not have liked Penney’s reliance on promotions, coupons and discounting to drive business, but weaning customers off them is shaping up as a bigger challenge than expected.

Johnson’s new pricing strategy—a somewhat convoluted three-tier model—hasn’t helped matters. I’m betting that a lot of shoppers found the chain’s new strategy even more confusing than the promotional clutter Johnson so disdained. Penney’s marketing, which appeared to be trying to duplicate Target’s whimsical, offbeat style, didn’t help matters.

Since Penney reported its results, Johnson has spoken with investors, asking them to be patient. He faulted the company's advertising and said that the chain will do a better job of explaining its new pricing strategy to customers.

But Penney’s problems have always had less to do with its price model than with its merchandise. And here is where the chain needs time. The retailer said that, by this fall, 47% of its goods will be new—some brands are being eliminated, some are being redesigned and new ones are being added. Brands in the Penney pipeline include Cynthia Rowley, Betsy Johnson, Michael Graves (to be part of a 20,000-sq.-ft. home department anchored by the Martha Stewart Shop), Vivienne Tam and Lulu Guinness. An impressive line up to be sure. Penney will also debut a new, hip in-house apparel brand, called jcp, this August.

These newly announced brands are part of Johnson’s ultimate vision, as previously announced, which is for Penney to have about 100 in-store shops within each of its stores by 2015. Indeed, the store would be transformed and bear little resemblance to the Penney of today. It would even have a Town Square area offering services and amenities.

“The farther out one looks with respect to [Johnson's] plans, the better the picture becomes,” said Bernard Sosnick, analyst for Gilford Securities, in a report on CNNMoney.
But even once all the changes are in place, Penney will still have a lot of work left to do. Can the retailer attract hipper and/or younger shoppers, consumers who are familiar with the likes of Lulu Guinness and Vivienne Tam—designers that, I’m betting, Penney’s core shoppers could care less about? Attracting new customers without alienating or turning off traditional ones is key to Penney’s success.

And while much of the attention has focused on Penney’s pricing and merchandise, the chain clearly has other challenges as well. In Tuesday’s conference call with investors, COO Michael Kramer made a rather startling admission with regards to the chain’s systems and IT infrastructure: “It’s a mess.” (The company runs some 490 applications, the vast majority of which are customized.) Updating Penney’s technology system, which is costing it dearly, is critical.

Given the size of the company and the scope of the changes that Penney is undertaking, no one thought that its transformation would be easy—or happen overnight. But many perhaps underestimated just how long it would take—and how bumpy a ride it would be. One thing is sure: The honeymoon is over for Ron Johnson. Now comes the hard part: Settling in and making the marriage work.

More As I See It entries.

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