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Analyst: Odds ‘firmly stacked in favor of failure’ at J.C. Penney

Going into this quarter, expectations for J.C. Penney were incredibly low – and the company has delivered squarely against them with another dire set of numbers. Despite very soft comparatives from last year, both net and comparable sales slipped, the latter down by a very sharp 5.5%. On the bottom line, profit remains elusive with a serious deterioration in losses at both operating and net income levels.

To be fair to the leadership of J.C. Penney, the results do not mean that there was no positive activity this quarter. Indeed, there have been a number of favorable steps taken in strengthening the leadership team, exiting certain categories like appliances, and reducing inventory. Some of these things have been damaging to the numbers, with the closure of the appliance business, for example, dragging down sales. However, we would argue that this short-term pain is necessary if J.C. Penney is to rebuild.

Despite the actions of leadership, the experience on the shop floor remains virtually unchanged. The majority of stores still have a dispiriting feel and are hard to shop with no coherence to ranges. Inspiration is severely lacking. As much as this is to be expected, if only because a turnaround cannot happen overnight, it underlines the fact that JCP continues to lose the goodwill and interest of shoppers and potential shoppers – one of the reasons why footfall to stores continues to wane. It also demonstrates how much work is yet to be done in reviving the brand.

Looking ahead, our main concern is not that CEO Jill Soltau will fail to take action nor that she will make the right decisions, but that the company will run out of time and capital to make the necessary changes. J.C. Penney is a very weak operator in one of the toughest sectors of a highly competitive retail market in an era of more subdued demand from highly fickle consumers. Put bluntly, the odds are firmly stacked in favor of failure.

All that said, we remain impressed with Ms. Soltau. Her approach seems levelheaded and customer-centric. She has taken decisive action to find and build a strong team with good experience. She has also made some sound initial decisions with regards to exiting areas of the business that are not delivering, including closing some stores. We are pleased that, despite time being of the essence, there have not been multiple knee-jerk reactions and, instead, that a comprehensive strategy is being put together for delivery in the next few months.

We expect this strategy to focus on a much improved and thinned down apparel offer, with a major focus on exclusive own brands. As this has been one of the major problem areas of the company, this approach will be most welcome, it will also help to improve margins. A better understanding of the customer will likely be a part of the plans, with that knowledge used to create a more cohesive shopping experience across departments and ranges. Bringing in new concessions, replicating the success of Sephora, is also a possibility as J.C. Penney looks to use its space more effectively. We do not exclude the possibility of further store closures as the new proposals.

Implementing some of the changes will be hard, especially when finances are so tight. However, educating shoppers about those changes and getting them to think anew about J.C. Penney will be even harder. This is the element that takes time and it is the area where we remain very skeptical about how successfully JCP can deliver.
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