J.C. Penney Plan Chills Investors Seeking Apple Magic: Retail

J.C. Penney Co. CEO Ron Johnson
J.C. Penney Co. CEO Ron Johnson took the stage yesterday to unveil his revival plan for J.C. Penney Co. Photographer: Astrid Stawiarz/Getty Images for J.C. Penney

Before Ron Johnson took the stage yesterday to unveil his revival plan for J.C. Penney Co., William Ackman, the chain’s largest shareholder, vowed it would be the most important day for retailing in 25 years.

Investors differed, and the shares sank during Johnson’s 90-minute presentation. It was a signal that his plan fell short of the excitement that has followed Johnson since he became chief executive officer in June after turning Apple Inc. stores into the world’s most successful retail operation.

Johnson’s strategy for the fourth-largest U.S. department store chain -- including fewer promotions, boutiques-within-a-store and hiring talk-show host Ellen Degeneres as a spokeswoman -- wasn’t the revolution many expected, said Liz Dunn, senior consumer analyst at Macquarie Capital in New York.

“The plan isn’t necessarily ground-breaking,” Dunn said in a telephone interview. “Anyone with a mind could have assessed that there needed to be a change to the stores, pricing strategy and marketing.”

The 52-year-old J.C. Penney CEO says he plans to use his experience at Apple stores to jump-start a retailer that has posted sales declines for the past two quarters. The 1,100-store chain cut its fourth-quarter profit forecast earlier this month, citing lower-than-expected sales and additional markdowns.

The entire sector is struggling. Department stores are expected to lose market share this year and generate sales growth of 1.7 percent, compared with a projected 3.4 percent gain for retail as a whole, according to Bloomberg Industries.

Investor Euphoria

On June 14, the day Johnson was named CEO, J.C. Penney shares surged 17 percent, the biggest gain in a decade. As of yesterday they had risen 14 percent to $34.27 since his arrival, triple the Standard & Poor’s Index gain over the same period.

Investor euphoria reflected Johnson’s record at Target Corp. and Apple. During 15 years as a merchandising executive at Target, Johnson brought in designers like Michael Graves and helped invent cheap chic. The strategy transformed the Minneapolis-based discounter into a nationwide destination for accessible fashion. Many retailers copied Johnson’s moves.

The late Steve Jobs hired Johnson in 2000 to create Apple stores. At the time, skeptics abounded, including Wall Street analysts. Yet the minimalist stores with their Genius Bars and speedy checkouts became a phenomenon and a model that has been copied widely, from Best Buy Co. to Staples Inc. Apple stores generate about $7,000 in sales per square foot, about 35 times as much as a department store, Johnson said yesterday during the presentation.

Why Leave Apple

“I have been asked so many times in the last eight months, ‘What we were you thinking? Why would you leave what’s now the most valued company in the world and come to J.C. Penney?’” Johnson said yesterday in Manhattan. “Some think this decision is counterintuitive. I feel like this is the exact time at J.C. Penney when I joined Apple.”

Johnson’s turnaround plan, scheduled to be complete by the end of 2015, borrows from his Target and Apple playbook. One theme: making shopping simpler. Johnson complained yesterday that Plano, Texas-based J.C. Penney's stores had too many items and sales events.

The chain has 400 brands and plans eventually to reduce that to 100, each with its own store-in-store.

J.C. Penney also will eliminate such events as Fourth of July sales, which totaled about 600 last year, and create lower opening price points. For example, a t-shirt with an initial price of $14 typically ended on sale for about $6, Johnson said. As of Feb. 1, that shirt will be offered for $7 from the get-go.

Triple Sales

The company will advertise monthly sales around a theme, such as all back-to-school items reduced in August. The goal is to increase store visits per customer from about four a year to once a month, and that could triple sales, Johnson said.

The chain will also change its store layout to emulate Apple. At Apple stores, there is an area dedicated to products and one focused on owners of those products that offer services, such as the Genius Bar.

J.C. Penney will follow suit by throwing out a department store signature: the jewelry and cosmetics counters at the center of the first floor. Instead, the stores will feature what Johnson called a “town square” offering entertainment and services not directly related to moving merchandise.

Taking a page from Target, Johnson plans to give the J.C. Penney brand a quirkier sense of humor. That’s where DeGeneres comes in. The chain plans to add more exclusive fashion brands, including a line from Nanette Lepore. It’s no coincidence that Michael Francis, the former chief marketing officer of Target, is Johnson’s new merchandising and marketing chief.

Apple Legacy

While some analysts talk up Johnson’s Apple legacy, translating elements of the strategy he used there to a middle-market department store won’t be easy, said Pam Goodfellow, an analyst at Worthington, Ohio-based BIGresearch.

“Apple’s success was part of J.C. Penney’s logic for hiring him,” she said. “But it’s hard to compare those stores.”

Apple is a cult brand with such game-changing products as the iPhone and iPad. J.C. Penney is a department store that caters to middle-class shoppers weighed down by stagnant wages and high unemployment, Goodfellow said.

“Maybe you can pique peoples’ interest and get them in the store, but we’re not seeing big wallets right now,” she said. “It’s not like we’ll have consumers full of optimism and happiness and they’re suddenly looking to spend more.”

No one says turning around J.C. Penney “will be easy,” Francis said in an interview yesterday.

“But we also have to remember that for half of America, this is still a brand that they admire, respect, visit and have an affinity for,” he said. “So we’re not starting at zero. What we’re doing is really taking the tarnish off the brass, if you will.”


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