Despite effective leader, odds still stacked against J.C. Penney

While a few chinks of light are emerging in the story of J.C. Penney’s revival, these are subsumed by the darkness of incredibly bad revenue numbers. A decline of over 9% in comparable sales reflects the fact that customers continue to desert the brand in droves. Some of the fall is down to the withdrawal from categories, such as appliances, but even when this is factored in, same-store sales remain negative to the tune of 6.6%.

The increasing irrelevance of the J.C. Penney brand is one that management is desperately trying to address. And, in our view, Jill Soltau and her team have made some sensible strategic calls as well as modest progress around areas such as inventory and margins. However, the blunt truth is that the steps taken to date do not show up where it matters most: on the shop floor. For most visitors to J.C. Penney stores, the experience is negative: a dispiriting selling environment that lacks inspiration, where the customer must do most of the work sifting through a morass of merchandise. This continues to reduce conversion and increase defection rates across the chain.
 
Management is conscious of this problem which is why it has been testing a new concept shop in Hurst, Texas. This experimental format represents J.C. Penney’s future vision and is markedly different from the average store. Everything from the logo to the layout has been revamped and the result is a modern shopping experience that is both inspiring and engaging. The inclusion of services such as barbers and relaxation zones like lounge areas are sensible additions which reflect the needs of contemporary consumers.
 
In our view, which is backed by our consumer research into the new concept, the reinvented store will increase traffic, conversion and sales. It will also enable J.C. Penney to improve its margins and volumes, making it a much more efficient and effective retailer. However, as much as we do not want to pour cold water on management’s efforts, we have two major concerns about the strategy.
 
First, as the new concept is such a radical departure from the J.C. Penney of old, rolling out the format across the chain will be incredibly expensive. We doubt that J.C. Penney has the financial muscle or capital to embark on such an ambitious program. Unfortunately, the company’s debt position and its huge losses mean that it is not in the position of Target, which embarked on a similar program of store reinvention. Of course, J.C. Penney could do a piecemeal rollout, but this will take many years – time that the company does not have given its current financial circumstances.
 
The second concern is that in some existing locations the new format will fall flat. This is less to do with J.C. Penney and more related to the fact that it is exposed to failing malls which are not going to see turnarounds in footfall no matter what J.C. Penney does to improve its stores. In our view, JCP needs to cut its exposure to these locations as quickly as possible so that it can concentrate on improving the locations that can deliver the best returns.
 
The current position of J.C. Penney is unfortunate. It finally seems to have a leader that understands retail and knows the direction the company needs to take. However, the question is whether it has the resource and energy to complete its journey. There is a slim chance it can make it if it manages to improve underlying trading by enough to stabilize losses and undertakes a gradual brand reinvention, using online to bolster sales. However, sadly, in our view, the odds are firmly stacked against it.