Early thoughts on JCPenney Q1 results

Before posting comments from RetailWire (probably tomorrow), I thought I would reflect on JCP first quarter results a day after their release:

1. I have been skeptical about several elements of the new strategy since it was announced in January, and many of my observations since then (on this blog and during several consultations) are based on repeated visits to JCP stores. I’ve visited stores from Florida to Wisconsin, and both mall anchors and small prototype stores. My biggest initial impression was that JCP needs to communicate its new pricing message more forcefully in-store, not just with an endless barrage of TV spots that look (frankly) just like Target ads.

2. At the same time, I appreciated that Ron Johnson and team needed to shake things up at JCP. The status quo was not an option, and nobody should have expected stellar results three months into the new strategy. However, the results are lower than even the most reduced expectations.

3. There are clear warning signs about the viability of the strategy as it stands today. The comp sales are tougher than expected, the gross margin is disappointing, the SGA rate soared instead of dropping despite the announced cuts in payroll, headquarters staffing and marketing. (Yes, I know these are annualized savings of $900 million.) And there are warning signs on the balance sheet, such as the 10% drop in inventory in the face of a 20% sales drop. If this trend continues, liquidating inventory will continue to be a problem and investors will run out of patience for “extraordinary items” given the $1/share writeoff at the end of fiscal 2011. The cash reserves are not a pretty sight, either.

4. I’ve said that — good or bad — the JCP experiment will be a B-school case study in the future. Right now, the biggest problem I see is the decision to change the pricing (thus chasing away JCP’s most loyal, value-driven customers) and the marketing before delivering on the brand promise of new content and an innovative in-store experience. Meanwhile, many of the new brand initiatives (Betsey Johnson, Tourneau) represent a pricing tier at odds with JCP’s own heritage as a purveyor of well-priced and well-made basics — and, more importantly, flying in the face of key competitors who are putting more emphasis on opening price key items.

5. Finally, a lot of the hype (and stock run-up) has been built on hope and the “personality cult” surrounding Ron Johnson and his new hires. Some members of this team reportedly received extraordinary compensation packages to sign up, while meanwhile the company is cutting commissions to sales associates and ending its dividend (not likely to sit well with JCP retirees). Not good symbolism for a company going through an austerity phase at the same time that it tries to reinvent itself.

Ron Johnson’s comment to an analyst question about employee morale (“It’s hard to know from where I sit”) seems especially tone-deaf…and he’d better figure it out. If his own organization doesn’t buy the vision, why should the rest of us?

And one final thought: If JCP drops 15% in volume this year (optimistic given the 20% decrease in Q1 but let’s give them credit for new initiatives during the second half), it needs four straight years of 5% comps to surpass its 2011 sales. (And no guarantees of that sales performance.) Unless the overall profit and productivity model becomes starkly higher, do investors have the patience to wait it out?

Bed Bath & Beyond buys Cost Plus

Bed Bath & Beyond announced its plans to acquire the Cost Plus/World Market business. While most of the RetailWire discussion centered on the opportunity to add food categories inside BB&B, I see broader areas for growth and assortment synergy:

Yes, there is an opportunity to expand the Cost Plus specialty food business into Bed Bath and Beyond — but there is an even bigger opportunity to add the “World Market” assortment of home decor, furniture and gifts. It will take a large footprint to pull this off, but the move allows BB&B to become an even more dominant home goods retailer.

Amazon expands its apparel offering

From RetailWire: It’s clear that Amazon is interested in gaining share in the apparel business. The discussion focused on designer business, but I see Amazon expanding across the price point spectrum:

There is a big difference between upper-moderate, better and designer price points but it wouldn’t be a surprise to see Amazon going after any and all of these market segments. Clearly the CFO of Macy’s takes Amazon seriously in this business, since she mentioned them in her earnings call yesterday. There is upside for Amazon here, perhaps even more on the margin side than the market share side.

Apple micro-stores at Target and Walmart: Compromising the brand?

Lots of discussion (on RetailWire) about Apple’s plans to expand its footprint inside Target and Walmart with “mini-stores,” not just product. I feel that the short-term benefits have some risks to Apple’s carefully polished brand position:

Two very different issues at play here: There is no question that Apple micro-stores within Target and Walmart are good for both retailers, and give both of them added credibility in the consumer electronics business. It also provides yet another threat to the Best Buy business model.

But the other side of the coin is the potential damage to the Apple brand itself. It has taken years for the Apple Store (and the product development behind it) to build priceless brand equity around innovation, premium pricing and customer service. If the Apple Store “experience” isn’t duplicated in your neighborhood Walmart, the risk may exceed the payback over the long run.

Target plans a fitnesswear specialty store

Target is always worth watching, as a recent discussion on RetailWire suggests. They are opening a store dedicated to activewear under the exclusive brand “C9″ — and this has some real legs if it’s successful:

This is an interesting development for several reasons. Target has obviously paid attention to the success of specialty retailers like Lululemon and Athleta, and the same concept at mass price points could be a winner. It also follows the growing trend of “smaller is better” relative to the massive scale of sporting goods like Dick’s and The Sports Authority, where fitnesswear is a small part of the assortment.

It’s not clear from the articles whether the Target “brand” will be attached to the stores or whether they will identified strictly as C9 Active Apparel. But it’s a winning idea with a lot of growth opportunity across the country — as well as a foothold into mall locations with other niche Target brands.

Should Target drop the Kindle?

From a recent RetailWire discussion, about Target’s decision to drop the Amazon Kindle from its assortment. Most comments defended Target given the increasing competition from Amazon in many product categories. I take a different view, driven by what products belong in the assortment:

I’m a little baffled by this decision, especially given the long history between the two companies — most of all when Amazon was spearheading Target’s e-commerce effort. And if dropping the Kindle is a way to punish a competitor, what’s next? Dropping the iPhone because people are using it inside Target for “showrooming”? (OK, obviously not.) To say that this decision is in the best interest of Target’s “guests” is disingenuous, considering the Kindle is the best-selling family of e-readers on the market.

Does Mom want a tech gift for Mother’s Day?

I know…Mother’s Day was a couple of days ago so this posting is late. The subject (on RetailWire) was whether retailers should be more creative about merchandising high-tech gifts compared to more traditional categories. Mark me as a traditionalist — and partly because of the very real budget constraints around this holiday:

Mother’s Day is still a holiday with a gift-giving budget ceiling, especially since the recession. Most tech gifts simply don’t fit into these price constraints, especially when you add in the cost of flowers or brunch. And, frankly, there is more personal sentiment required for a Mother’s Day gift — putting jewelry, apparel or other personal gifts at the top of the list. Rather than being overly adventurous, it may make more sense for department stores and apparel retailers to focus on what they do best.

Fast Fashion: A better path to smart supply chain management?

One of the hot topics recently on RetailWire (and on the podcast link posted above) is the impact of “fast fashion” on more conventionally managed American retailers. It’s not just about buying trend-right apparel closer to peak demand, but also about sourcing these goods closer to home. The higher costs may be more than offset by “getting it right” and better cash flow, too. Here’s my comment from a recent RetailWire panel discussion:

Many stores (JCP and Kohl’s among them) have taken a page from “fast fashion” retailers by developing their own quick-response brands, such as MNG and Elle. There is still a place for overseas production of more predictable apparel items, such as opening price knit tops, but it’s worth striking a balance.

The biggest opportunity for “fast fashion” is in the specialty arena, where some retailers continue to place big early bets on key items — some specialists were loaded with plaid last fall and the clearance racks are still full. It’s well worth considering the cost savings of long-lead time production vs. the cost of money and — most important — the cost of a bad bet.

MetaScale: Sears tries marketing its assets again

I’ve lost track of the number of discussions over the years about various strategies used by Sears Holdings to “leverage its assets” rather than fixing what’s broken. MetaScale is a data management service (pitched to other retailers) that represents the latest opportunity to avoid spending capital in stores or updating the merchandise content. Here’s my comment from RetailWire:

There is a long list of specialists in providing data services and information management especially to retailers — such as IBM, SAP, SAS and others. This looks like yet another attempt by Sears Holdings to avoid dealing with its core problem: The lack of capital spending and compelling merchandise in its stores.

If the methodology behind MetaScale were so effective, wouldn’t we all be talking about Sears’ great results in supply chain and inventory management? Sears Holdings ended 2011 with 5% less inventory but also had a gross margin decrease from 27.2% to 25.5% — not exactly worthy of bragging rights.

Brand awareness for Uniqlo: Is a web presence enough?

From a recent RetailWire discussion: The issue is whether Uniqlo (the Japanese “fast fashion” retailer) can establish a beachhead in the U.S. through its website rather than a more aggressive bricks-and-mortar expansion. Here’s my opinion, with some added comments below:

Zara, H & M and even Ikea are great examples of foreign retailers (not necessarily apparel stores) who leveraged both e-commerce and bricks-and-mortar growth to build awareness and a strong U.S. presence. There is some natural synergy between channels that Uniqlo would be smart to learn from. Simply building a web business without opening some tangible “flagship” stores in key markets probably isn’t enough by itself to drive the brand.

Just to add a note: I visited the Uniqlo store on 34th Street in Manhattan last week (one of three New York locations) and the store is stunning. Great presentation, depth of fashion and basic inventory at compelling price points. I don’t think a web presence alone can communicate what’s special about this store, although operating in a smaller footprint (as H&M has learned to do) will be a challenge.