By Neil Saunders
To deliver a comparable sales decline of 5.4% is poor. To do it when consumer confidence and spending are at their peak is atrocious. On top of this, JC Penney’s profitability waned further with operating losses of $100 million and a net loss of $151 million only adding to the company’s woes.
JCP has made improvements to areas like home, so it is capable of disciplined thinking and merchandising, but it needs to get much better at executing this.
This terrible position sets the scene for the entry of Jill Soltau, the new CEO who is hoping to turn around the business. If she didn’t realize it before, she will now be clear about the monumental task facing her. This isn’t so much running up a down escalator, it’s more akin to running up a super-speed down escalator with slippery oil poured all over it.
Thinking in a customer-centric way
The first and most pressing task for Jill Soltau is to get JC Penney back to thinking in a customer-centric way. For far too long the company has undertaken random initiatives with seemingly no consideration of who the core customer is or what they want. With an incredibly tight balance sheet, JCP can no longer afford to squander resources; everything it undertakes must be laser-focused to deliver increased sales and profit.
Holding the customer foremost in mind, one of the next most important areas to tackle is apparel. Clothing at JCP has become a hotchpotch of randomness brought about by a constantly shifting view of who the chain should target. This has left customers both confused and unimpressed. Satisfaction scores for apparel shopping have plummeted over recent years and customers have defected as a result. But JCP does have some solid own labels, and it needs to develop and showcase these more effectively, especially in stores.
Better merchandising is key if new brands like Peyton & Parker are to have any chance of success. Peyton and Parker is nicely designed and curated, but the effect is lost in most stores and on JCP’s website, where the label gets completely drowned in a sea of merchandise and general clutter. JCP has made improvements to areas like home, so it is capable of disciplined thinking and merchandising, but it needs to get much better at executing this.
Addressing store estate
JCP also needs to address its store estate. There will be many locations that are not profitable and/or not capable of producing a solid return on investment. These branches must be pruned or put to productive use as outlets. This will leave JCP free to focus on, and invest in, shops where it can make a real difference to both the top and bottom line. In some ways, this is similar to the strategy Macy’s has used to target its capital expenditure to areas that can generate a good return.
In the near term, JCP may hope that the demise of Sears will help the business. However, we are not particularly confident about this. The category and shopper overlap is not as great as is sometimes assumed, and while JCP may make gains, they will be relatively small scale. Moreover, the exit of Sears from some malls may actually harm traffic, which will have a negative knock-on impact for JCP.
The jury is out on whether JCP will follow the path of Macy’s or Sears—of reinvention or of terminal decline. The good news is that the business now has a CEO determined to follow the former course and who has the skills required for the journey. However, time is not on her side.
Neil Saunders is managing director of research firm GlobalData Retail.