J.C. Penney's First-Quarter Plight

The department store chain warns of back-to-back monthly sales drops, as neither a new product line nor Oprah helped

For a second time this year, J.C. Penney (JCP) will miss its sales numbers. The department store chain warned on Mar. 28 that its sales at stores open a year or more will drop more than 10% in the month of March, which will also pull down sales and earnings in the quarter. That comes after a 6.7% sales drop in February.

CEO Myron Ullman III didn't mince words about the link between Penney's results and the economic downturn, saying in a prepared statement: "J.C. Penney counts half of American families as its customers, and they are feeling macro-economic pressures from many areas, including higher energy costs, deteriorating employment trends, and significant issues in the housing and credit markets. The sharp decline in sales is reflective of these trends." Investors apparently agreed, pushing Penney's stock price down 7.5% on the day of the report, to 37.48.

The Oprah Incident

The economic woes coincided with an odd snafu that demonstrates the challenges Penney faces in climbing out of its hole. It might seem a minor point, but on Feb. 20 several items of Penney clothing were featured on one of the highly desired product lists on the Oprah TV show. One striking red trench coat, listed for $130, made the list of "10 basics for every woman" and was also included on the "Instant Style" page of InStyle magazine's March issue. Both the show and the magazine directed their audiences to the company's Web site. The only problem was that any of the 7.5 million Oprah viewers who went to www.jcp.com to buy the red trench on Feb. 20, or afterward, couldn't find it. As a viewer identified as Jamie posted on Oprah's message board: "Several items I searched for couldn't be found.…So much for being easily accessible."

Penney spokesperson Kate Parkhouse says that in fact the item was available only at Penney stores, and has since sold out there as well.

Bad Timing?

The Oprah incident may be an example of problems Penney is having in managing its inventory, especially as it makes room on store shelves for American Living, its new brand of apparel, accessories, and home furnishings. The new brand was launched on the same day the show aired. Designed by Global Brand Concepts, a division of Polo Ralph Lauren (RL), American Living is slightly higher-priced when measured against the comparable Chaps brand at rival Kohl's (KSS).

Many analysts on Wall Street are questioning the launch of the higher-priced products at a time when, by Ullman's own assessment, "consumer confidence is at a multi-year low" (BusinessWeek.com, 3/27/08). Penney's same-store sales have declined for nine of the past 12 months.

"The timing couldn't be any worse," says JPMorgan (JPM) analyst Charles Grom, who on Mar. 5 downgraded Penney shares to neutral from overweight. Grom noted that despite the marketing and advertising push that accompanied American Living's launch, it failed to inspire shoppers in the last week of February. "We thought customer curiosity would have driven a nice pickup in traffic at a minimum."

Ongoing Pressure

Another problem: New furniture, drapes, and other home goods are often purchased along with a new home or after a relocation. That category, which makes up 20% of Penney's total sales, has been hammered by the decline in home sales. The new brand might add to that stress, with its own list of items for the home such as quilts and drapes. "Penney is trying to create a unique identity and is counting on Ralph Lauren—but that's not going to work now," says Robert Passikoff, CEO of Brand Keys, a customer loyalty and brand consulting firm in New York. Whatever problems Penney has with its mix of merchandise right now, they are clearly being exacerbated by an overall consumer spending slump (BusinessWeek.com, 3/25/08).

Penney's inability to move apparel, home furnishings, and jewelry off its racks contributed to a 3.7% rise in store inventory levels at the end of the fourth quarter. Competitor Kohl's, meanwhile, managed to work inventory levels down by 2.6%.

Don't look for the pressure to let up any time soon: The same day Penney gave its sales warning, the Commerce Dept. reported personal spending rose a mere 0.1% in February, its smallest growth in 17 months. Investors took the bad news out on other retailers as well, pushing down Kohl's stock price by 5%, Macy's (M) by 5%, and Nordstrom (JWN) by 4%. "Consumers have clearly stepped on the brakes and Penney is the all-American barometer of the family department store business; not a good time for retail," says Burt Flickinger III, managing director of retail consultant Strategic Resource Group.

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