J.C. Penney is far from out of the woods as it attempts yet another turnaround.
The ailing Plano, Texas-based department store chain reported falling sales and more store closings recently, while key executive positions still remain vacant. Just as unsettling for many analysts is the fact that the retailer still hasn’t announced tangible plans for a turnaround.
That’s not to say there aren’t any encouraging signs. Jill Soltau, former Jo-Ann Stores CEO, took the helm in October, replacing Marvin Ellison, who abruptly left to head up Lowe’s.
“I am excited to be at JCPenney… and I am encouraged by the many opportunities I see,” Soltau said in a November statement. “Our objective to put JCPenney back on a path to profitable growth is clear... We are making progress and taking the necessary steps to right-size our inventory positions to better support the brands and categories that are demonstrating profitable sales growth.”
“While restoring JCPenney to sustained profitable growth will be a lengthy process, I understand the need for quick action,” she added.
The road back to profitability for the once-iconic retailer won’t be easy, however.
J.C. Penney has more than $4 billion in debt and a stock price of just $1.24 per share, as of mid-day Wednesday. Its stocks sank below $1 per share at the end of December—the first time since the retailer started trading in 1929.
Investors reportedly were concerned about sluggish holiday sales. J.C. Penney shares peaked in 2007, at nearly $86 per share.
The beleaguered retailer faces an uncertain future after reporting its latest round of weak earnings. It announced that same-store holiday sales for the nine-week period ending Jan. 5 dropped 3.5 percent on an adjusted basis. However, it reaffirmed its goal to generate positive free cash flow for fiscal 2018.
Meanwhile, same-store sales fell 5.4 percent for the third quarter and net loss for the quarter totaled $151 million.
The chain also announced plans to shutter three more stores this spring as it assesses its bricks-and-mortar portfolio. It’s unclear which locations will close. The company said it will give more information about additional closings during its fourth-quarter results report on Feb. 28.
J.C. Penney still operates 860 stores around the country, after shuttering about 140 locations in 2017.
More downsizing is necessary
“Considering the debt load, it would make sense to close unprofitable stores and refocus on the stores that do most of the business,” says Gabriella Santaniello, president and founder of retail consulting firm A Line Partners in Los Angeles. “Chances are many of those stores are in dying malls anyway.”
Analysts predict anywhere from 20 to more than 100 additional J.C. Penney stores could close, reported CNBC.
“We’re projecting a 5 percent decline in store count for J.C. Penney for 2019,” says Christina Boni, vice president and senior analyst at Moody’s Investors Service. That means 40 to 50 stores could close. “They continue to look at their store base and figure out what’s the appropriate store footprint,” she notes.
According to Moody’s, the retailer’s management is trying to better understand how its bricks-and-mortar presence can drive sales in specific markets.
Boni says it’s important to look at the footprint within each market when looking to trim the store base.
“Customers today don’t only go to the store,” she says. “They buy online and expect to be able to pick up in store and ship to store and return to store. If you don’t have the appropriate bricks-and-mortar exposure within a retail market that also impacts your online strategy.”
Meanwhile, J.C. Penney needs to improve its online penetration, which has lagged its peers, she adds.
How did J.C. Penney get here?
The retailer has been struggling with plummeting sales as has Sears, which filed bankruptcy in October and closed hundreds of stores. The two chains were once entrenched mall anchors and leading U.S. retailers. However, they’ve been hit hard by competition from superstores like Walmart, fast-fashion and off-price retailers and growing e-commerce players like Amazon.
J.C. Penney also suffered several unsuccessful business revamps. For example, former Apple executive Ron Johnson was hired in 2011 to modernize the retailer. Johnson eliminated promotional “doorbuster” sales, coupons and clearance sales and introduced an “everyday low pricing” strategy. However, the strategy ended up alienating the chain’s core customers.
“It was a great idea, but it was very poorly executed,” says Ricardo Rubi, retail marketing specialist and partner at New York consulting firm Simon-Kucher & Partners. “They were trying to do something different that would appeal to a different consumer, but a couple of things went wrong. No. 1 it was too fast. They didn’t even have time for the consumers whom it would be appealing to, to learn and explore, and second, it completely alienated the consumers that were going to the store because they liked their promotions.”
Such drastic changes need to be phased, Rubi says.
“You have to start scaling back promotions little by little/ It’s like a drug. You have to ease people off of the drug.”
Johnson’s successors were also unable to establish a clear identity for J.C Penney and execute a turnaround.
Executive positions still vacant
The company announced it was filling two executive positions, including appointing Truett Horne, formerly an associate principal at McKinsey & Co., as chief transformation officer to develop and implement new strategies. The hires, however, come more than three months after Soltau joined the company.
“It should have been announced before the holidays to give J.C. Penney employees and investors some peace of mind in knowing that there is strong leadership in place,” Santaniello says.
The company still needs to hire a chief customer officer, chief merchant officer and head of planning and allocation. Its principal accounting officer will leave in March, and the CFO position remains vacant.
Still no transformation strategy announced
Soltau has made reducing inventory a big priority and said J.C. Penney plans to reduce inventory by more than $225 million, or 8 percent for the year, and expects year-end liquidity of about $2 billion.
However, industry experts say they want to see more concrete turnaround plans that go further than cutting inventory and closing stores.
“One of the things that concerns me—and I know they’re somewhat in a panic mode—is the new CEO hasn’t really displayed any plan on what that turnaround is actually going to look like,” Rubi says. “And I know that it cannot be something that’s 100 percent purely operational.”
From a commercial side, there are some big issues, he adds. “People are not stopping shopping at J.C. Penney because they have too much inventory. People need a reason to actually go, and they’re not really giving people a reason right now. It’s not very clear to me what that reason will be or what steps will be taken in order to get there.”
Can J.C. Penney profit from Sears’ struggles?
Sears reached a deal recently allowing it to emerge from bankruptcy in a downsized format. However, whether Sears Chairman Eddie Lampert can execute a turnaround is still questionable.
“It will be TBD to see what happens with Sears, ultimately, if they try to reemerge with a smaller set of stores or whether they close completely,” Boni says. “Those customers could be a potential opportunity for J.C. Penney, given their significant overlap.”
“I think everyone around them is going to benefit in some way,” Rubi says. “But it’s going to be up to each department store or other brands on how well they can actually take advantage of that situation.”
J.C. Penney needs to come up with a strategy to capture Sears and Kmart customers, but they need to have a compelling product offering, Santaniello adds.
“The company already has buy online/pick-up-in-store in place, which has been successful and has been making headway with its omni-channel strategy, so the focus now is on product and customer engagement like social media,” she says.
“However, the CEO has been completely silent since taking the helm, and that’s breeding speculation and doubt in her ability to turn the company around,” notes Santaniello.
A turnaround will be tough
The transformation will be around making the brand exciting for people, Rubi says. What are they going to do differently to give people a reason to go to J.C. Penney? They’ll need to take “very out-of the-box measures” that could include new store layouts, modernizing stores and finding ways to bring back core customers, Rubi notes.
The turnaround’s success is going to be contingent, however, on whether J.C. Penney can stop the bleeding enough to be able to start improving, Rubi adds.
“It’s going to be very tricky and it’s going to be extremely hard,” he says.
