Analysis: Biggest problems for J.C. Penney are relevance and profile
There is no getting around the fact that today's results from JCP are inauspicious. As much as the company heralds the fact it managed to post positive comparable sales, a rise of 0.2% is incredibly weak. This is especially so as it comes off the back of a very soft prior year comparative (when comparables fell by 1.3%) and coincides with a period of more robust consumer spending.
JCP attributes the slower growth to the late start to spring. While there may be some truth in this, we don't buy the excuse as the main reason for underperformance. Other retailers managed to post reasonable results over the same period. Moreover, discounting rates in apparel over the second quarter were not particularly elevated -- a sign that others managed inventory well and were not plagued by especially weak demand.
We do accept that apparel sales were sluggish over the period, but in our view, this has more to do with the poor assortment at JCP than the vagaries of the weather. Despite some changes to clothing, we still believe that ranges lack conviction and coherence, especially in womenswear. In short, the offer is just not all that compelling.
Without an inspiring apparel offer, JCP found it harder to pull in customer traffic and extract dollars from those consumers willing and able to treat themselves. While other retailers, including Macy's, made gains here, JCP floundered. In our view, the problems in apparel are now serious and more decisive action is required to correct them. To be fair, improvements are coming through, but the pace of change needs to be increased and communication of those changes to consumers amplified.
Away from apparel, it was disappointing to see that JCP did not make major gains in home furnishings. This has been an area of investment and focus, with improvements visible in stores. Consumer spending on home-related products was relatively good over the period, so a downswing in demand cannot be blamed for JCP's lack of traction. Instead, we attribute the softness to lapping some tougher prior year comparatives and increased competition from many other retailers which have also been investing in the home category.
Fortunately for JCP, Sephora remains a bright spot and is still pulling in customers and driving sales. The beauty market is generally robust, and JCP is able to take a slice of this action thanks to the Sephora shop-in-shop concept within its stores. However, where we are less impressed is in JCP's ability to convert some of this traffic and custom into trade elsewhere in the store.
In our view, the biggest problems for JCP are relevance and profile. While improvements have been made to certain areas, JCP is still not standing out amongst a sea of competing products and concepts. This means it is not a destination for most things, other than perhaps beauty, and is struggling to drive traffic to stores. Quite simply, it drops off the consumer radar far too easily. What it needs to do is develop more compelling own-brands in all categories and curate these in a way that is meaningful to its target customer. This would strengthen the whole business and would encourage shopping across departments.
Unfortunately, JCP's financial headroom remains limited. While losses are improving thanks to the closure of stores -- which is the reason totals sales are down by 4.3% -- the company remains in the red. Indeed, JCP has started its new fiscal year with a $78 million net loss and is only just profitable at operating level.
As much as we recognize many of the positive changes JCP has made to date, and as much as we respect the highly engaged management team, we believe that now is the time to up the pace of change with bolder and more ambitious moves across all categories.
JCP attributes the slower growth to the late start to spring. While there may be some truth in this, we don't buy the excuse as the main reason for underperformance. Other retailers managed to post reasonable results over the same period. Moreover, discounting rates in apparel over the second quarter were not particularly elevated -- a sign that others managed inventory well and were not plagued by especially weak demand.
We do accept that apparel sales were sluggish over the period, but in our view, this has more to do with the poor assortment at JCP than the vagaries of the weather. Despite some changes to clothing, we still believe that ranges lack conviction and coherence, especially in womenswear. In short, the offer is just not all that compelling.
Without an inspiring apparel offer, JCP found it harder to pull in customer traffic and extract dollars from those consumers willing and able to treat themselves. While other retailers, including Macy's, made gains here, JCP floundered. In our view, the problems in apparel are now serious and more decisive action is required to correct them. To be fair, improvements are coming through, but the pace of change needs to be increased and communication of those changes to consumers amplified.
Away from apparel, it was disappointing to see that JCP did not make major gains in home furnishings. This has been an area of investment and focus, with improvements visible in stores. Consumer spending on home-related products was relatively good over the period, so a downswing in demand cannot be blamed for JCP's lack of traction. Instead, we attribute the softness to lapping some tougher prior year comparatives and increased competition from many other retailers which have also been investing in the home category.
Fortunately for JCP, Sephora remains a bright spot and is still pulling in customers and driving sales. The beauty market is generally robust, and JCP is able to take a slice of this action thanks to the Sephora shop-in-shop concept within its stores. However, where we are less impressed is in JCP's ability to convert some of this traffic and custom into trade elsewhere in the store.
In our view, the biggest problems for JCP are relevance and profile. While improvements have been made to certain areas, JCP is still not standing out amongst a sea of competing products and concepts. This means it is not a destination for most things, other than perhaps beauty, and is struggling to drive traffic to stores. Quite simply, it drops off the consumer radar far too easily. What it needs to do is develop more compelling own-brands in all categories and curate these in a way that is meaningful to its target customer. This would strengthen the whole business and would encourage shopping across departments.
Unfortunately, JCP's financial headroom remains limited. While losses are improving thanks to the closure of stores -- which is the reason totals sales are down by 4.3% -- the company remains in the red. Indeed, JCP has started its new fiscal year with a $78 million net loss and is only just profitable at operating level.
As much as we recognize many of the positive changes JCP has made to date, and as much as we respect the highly engaged management team, we believe that now is the time to up the pace of change with bolder and more ambitious moves across all categories.