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?


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