On September 1st, J.C. Penney (JCP) debuted more new "shops," bringing it about 10% of the way through a transformation plan aimed at having 700 of the chain's 1100 department stores offer shoppers 100 distinct "store within a store" experiences by 2015. My wife and I used part of our Labor Day holiday to do some market research at a local Portland mall and check out the progress at one of these renovated JCP locations.
I have been doing a fair amount of work on JCP lately, trying to figure out if it is a turnaround story I want to play or not. For me, there are three essential questions to ask when making this kind of investment decision. One, do I want to make a bullish bet on a JCP turnaround under new CEO Ron Johnson? Two, at what share price do I feel the risk-reward is attractive enough for the stock? And three, since this is a multi-year turnaround story (renovating 700 stores while they remain open is not easy), at what point in the process would it make the most sense to start buying?
With much of the valuation work done already from my office, my in-person store visit on Monday was more about checking out how the renovations looked and how shoppers were responding to them. I went to one location, in the morning, on a holiday, so this is by no means enough observation to draw strong conclusions about customer traffic, but it was enough to get an idea of where these stores are heading over the next few years.As soon as you walk into the store, you see the original "store within a store" concept, Sephora, that JCP introduced even before Ron Johnson took over as CEO:
The Sephora stores inside J.C. Penney have done very well. They look identical to actual Sephora stores, just with fewer square feet. The successes JCP has seen so far are often cited as a reason why the concept of converting the entire JCP store into dozens of specialty shops has huge potential. I would agree with that assessment, but it completely depends on what products you are selling. Sephora is very popular right now, so it would be hard for it to do poorly. What about other brands? That is the big question mark at this point.
Which brings us to the new shops JCP unveiled this month; IZOD, Liz Claiborne, and JCP (a generic house brand for basics). These are in addition to those already in place; Sephora, iJeans by Buffalo, Levi's, The Original Arizona Jean Co, and MNG by Mango. You may have noticed something odd about that list already, but we'll get to that shortly. For those who have not been in a JCP lately, here is what these new shops look like:
Notice there is nothing earth-shattering or particularly new here in terms of product. What they have essentially done is group product by brand and install upgraded fixtures and displays, so you feel like you are shopping at a smaller Gap or J Crew store within the mall, not at the enormous J.C. Penney anchor location. For instance, here is what most of the store's floor at JCP still looks like:
Obviously, cleaning up the stores by making them less cluttered, adding better lighting, and displaying the clothes more effectively is probably an investment worth making, if you are trying to revamp a department store and position it for long-term survival. Still, the early response by customers has been poor. Making the stores look nicer has not counteracted the negative impact from JCP's decision to reduce the number of sales they run and opt instead for everyday low prices on most items. Rather than paying $25 for a sweater originally marked $75 or $80 (although nobody ever paid that price), JCP has faith that shoppers will make the same purchase, even if it is marked $25 from the start with no discount. Shoppers are balking. The first quarter after the change (Q1 2012), sales dropped 19%. Last quarter they fell by 22%. I don't think there is reason to think the current quarter will be much different.
The pricing issue was something I made a point to watch for during my store visit. Again, it was before noon on Labor Day, so there was not much traffic in the stores. However, you may have noticed that there weren't any shoppers in the photos above. I was not the only one in the store, and I did not ask anyone to get out of the shots. So where were they? Well, look at that, there they are:
The clearance rack. Despite JCP's goal of getting 80%+ of their sales from full price merchandise with their new everyday low price strategy, the store still has product it needs to move quickly, so the clearance racks have not gone away. Interestingly, the signs on these racks do not simply say "clearance" but rather "clearance - $5 and up." Why put "$5" on the sign, which just signals you have really cheap sale merchandise (and gets you thinking that full price may be overpriced)? I don't know. It seems counter-productive. My wife even mentioned that she saw a $20 sweater that she liked, but since it was positioned close to the sale racks, she instinctively looked up to see if it was on sale. When it wasn't, she questioned whether people would think $20 was a good enough price (even though a $20 sweater, on its own, is quite inexpensive). This is what JCP is facing with their new strategy.
Even bigger than pricing strategy is that shoppers are still gravitating to the sale racks, even with these new, upgraded specialty shops. That is where the customers were on Monday, which jives with the trend they have seen so far this year; less traffic, fewer sales, and lower gross margin on each sale. Shoppers are still fixated on sales, and if you don't have as many, they will either leave the store, or only buy the cheaper stuff. Not a good recipe for a retail turnaround (given that JCP is trying to do the exact opposite).
After my in-store visit to JCP this week I was hoping to shed some light on the first of three questions I mentioned at the outset of this post; do I want to make a bullish bet on a JCP turnaround? When you listen to Ron Johnson articulate the ideas he has, they make sense and you can't help but be inclined to think he just might make it work. And he might. However, I had mixed feelings after seeing the store. The shops look nice, but so far customers have not responded, in large part due to pricing. They still flock to the sale racks.
I think JCP can fix this problem to a large degree by offering unique product (like Sephora) in order to differentiate themselves from other stores like Sears, Kohls, and Macys. I am not sure that the Levi's, Arizona Jean Co, and JCP brands do that. Even Liz Claiborne, which is exclusive to JCP, might not be different enough from other similar brands found in competing stores to make people want to go to JCP first.
Not only that, but did you notice the odd choice for the initial set of new specialty shops? Levi's, the Original Arizona Jeans Co, and iJeans by Buffalo are all among the first eight shops. How many choices of jeans does one need? And is that really the best way to use their concept, by duplicating product so much? And you know there are other brands of jeans in the store already (I saw Lee jeans right next to the Levi's shop, for instance). In fact, while we were there my wife overheard a female shopper ask for some help finding a pair of new jeans. The employee walked her over to the Levi's shop, but then told her, unfortunately, that there were jeans scattered around the store, so although this was the best place to start, she would have to walk the entire floor to see everything they had.
That type of shopping experience is exactly what you would expect from a large, disorganized department store; the exact model JCP is trying to get away from. If you are aiming for a wonderful shopping experience (Ron Johnson is aiming low --- trying to becoming "America's favorite store"), you probably don't need three denim brands in your first eight shops. And if you do, at least put them close together and remove the other jeans from the rest of the store. First impressions are everything, as new shops are going to be added periodically over the next three years.
As you can see, this is still very much a work in progress. So, I remain skeptical and will likely want to see some proof of changing customer behavior in future quarters before I take a bullish stance. Right now it is more about the potential for success (if executed better in the future) and less about solid progress thus far.
More thoughts on JCP are coming shortly, so stay tuned.
Full Disclosure: No position in any of the stocks mentioned at the time of writing, but positions may change at any time