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Analysis: J.C. Penney’s biggest problem area is in apparel

Although this was a jolly holiday for most retailers, there was little cheer for J.C. Penney where comparable sales dropped by 5.4% on an unshifted basis. Worryingly, the pace of decline remains the same as that posted during the third quarter, even though there was significant momentum in consumer spending across both Black Friday and Christmas.

In our view, J.C. Penney went into the festive season in a weakened state and, therefore, was not able to capitalize on the favorable trends. Stores, for example, were densely packed full of merchandise and provided consumers with a less than inspiring shopping experience. The same is true online where a vast array of products with few standout items reduced conversion rates. Extensive discounting did little to remedy these weaknesses or stimulate revenue growth.

The biggest problem area is in apparel, where J.C. Penney continues to lose both customers and market share. Given the criticality of the category in driving custom, this is now having a negative knock-on effect on other sectors like home and electronics. In essence, unless the issues in clothing are corrected, J.C. Penney will remain in a death spiral.

While J.C. Penney did make some effort to boost sales by stocking toys over the holidays, the overall impact was lackluster. In typical fashion, toy departments lacked discipline and across many stores, with the presentation, merchandising and ranging all leaving a lot to be desired. Against stiff competition from other players, this approach was simply not good enough to drive trade.

With a bad Christmas behind it, 2019 will be a tough year for J.C. Penney. There are some plus points, including the forecast of positive cash flow and reduced inventory. However, the fact that the company cannot trade successfully in even the most auspicious of circumstances does not bode well for a year that will be more challenging than 2018.

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