Tuesday, November 27, 2012

JCP: Doomsday or New Beginning?

Things don’t seem to be going exactly the way JC Penney CEO Ron Johnson hoped they would a year ago.

You may have noticed the precipitous fall in JC Penney comp store sales which started almost the day the new CEO walked in the door. For the latest quarter ending October 27th, Penney’s comp store sales were down a shocking 26.1%. For the latest nine-month period, comp sales are down 22.3%. During the nine-month period ending October 29, 2011, just days before Johnson was hired, comp stores gained a modest but still positive 1.2%. To be completely honest, in my 30-plus years in the retail industry, I can’t recall any other retailer’s sales even coming close to falling as dramatically in such a short stretch.

JC Penney should be concerned – but what if Johnson should ultimately be proven correct in his strategy for rebooting the perennial retail icon? In that case, JCP’s department store rivals should also be a little concerned.

Let’s look at the history: JC Penney was once a highly promotional department store, running a slew of ads in just about every daily newspaper in the country. There was always something on sale at Penney’s, a strategy not unlike that employed by any number of department store brethren. Penney was a go-to establishment for Middle America, typically attracting an older customer while leaving the younger set to more trendy retailers. Slow and steady seemed to be the corporate mantra, with an apparent unwillingness to step outside the box and compete for a broader base.

Then along came Kohl’s. Kohl’s roots go back to 1962 when it began as a grocery business. During that early decade the Kohl family started their department store division, positioning itself between higher-end department stores and discounters. In 1978, Batus, Inc., a major department store group, acquired the 10-unit Kohl’s Department Store chain and methodically grew it to 40 units by 1986. A management-led group of investors then acquired the chain, which became Kohl’s Corporation. However, it wasn’t until 1992 that Kohl’s entered its heyday, becoming a public company with the necessary capital for an aggressive expansion program. Between 1992 and 1999, Kohl’s more than tripled the size of the company to 259 stores, and became JC Penney’s number one competitor - and its worst nightmare. Kohl’s was able to blend branded merchandise with private label goods while diverting significant numbers of Penney shoppers and attracting a younger customer. That’s why, when Kohl’s wanted to jump into the regional mall fray as part of its expansion strategy, Penney would apply its approval rights when it could and prevent Kohl’s from entering - at least until Kohl’s simply found a pad across the street. Since that time Kohl’s has continued to pound away.

JC Penney was in need of a quick fix, and in walked Allen Questrom, the first outsider hired to run the company in nearly a century. Coming on board in 2000 as the new CEO and regarded as one of the industry’s top merchants, Questrom was the right leader at the right time. Unfortunately, his stay was much too short. Following a turnaround of the company, including the sale of Eckerd Drug, the aging Questrom decided to retire in 2004. In 2011, JC Penney, in need of another visionary, gave Johnson the call.

Although a somewhat intriguing hire having come from Apple, Johnson also had executive experience at Target on his resume, and many believed this was the “outside the box” decision that Penney needed to make. Thus the radical and much-heralded change in pricing strategy and the precipitous sales declines which may have left the Penney board wondering why it ever strayed from its slow and steady approach. Recently, to stop the bleeding, Johnson, without admitting that overhauling its pricing strategy may have come too abruptly, implemented a holiday sales promotion between Black Friday and Christmas Eve whereby coded buttons will be passed to customers indicating whether she has won any of a number of prizes, anything from a trip to Disneyland to JCP gift cards, an idea that is promotional while downplaying the sales promotion feeling. In the words of Johnson, "We believe in acts of generosity."

At this point you may be thinking that Penney’s fate is inevitable. Allen Questrom made a recent statement that he is “shocked” at the drastic changes in pricing strategy and pointed to the unprecedented decline in sales. While he’s not sure about the changes in store layout and the remerchandising effort, he questioned the lack of test-marketing before going full bore with a strategy that may ultimately fail. But don’t count JCP out just yet. Because the reality is, if you’ve had an opportunity to see the significant upgrade to presentation and the introduction of quality brand names and designer labels in Penney stores, you’ve likely come away impressed. And it’s early in the game for the “visionary” CEO; Johnson has stated that it will not be until 2014 that his plan is fully implemented. Could he pull it off and prove the naysayers wrong?

It’s my opinion that the loss in sales thus far is largely a result of previously loyal shoppers jumping ship for Kohl’s, Macy’s, Dillard’s and Target. Sales at these firms have been generally improving this year for which they can probably give thanks, at least in part, to Penney’s – but that thanks may be short-lived if those shoppers begin to migrate back, and Johnson succeeds in drawing in a new, younger department store shopper. While many people think Ron Johnson’s strategy for JC Penney is way off course, its brethren department stores better hope Johnson doesn’t, eventually, have the last laugh.

Bob Sheehan, Vice President of Research

Company News

New Employees: Aaron Huntley joined the Burlington, MA office as an Investment Sales Assistant, supporting VP of Investment Sales Jonathan Aron. Aaron is a recent graduate of James Madison University and has experience with Cushman & Wakefield and TJX Corp. Glenn Maggiocomo joined the Burlington office as Marketing Coordinator, overseeing shopping center marketing programs. Kelly Oyekoya joined the Burlington office as a Property Manager for the Woburn Mall. Kelly has many years of experience in property management, most recently with Jones Lang LaSalle.

Industry News: National

US chain store comp retail sales for October rose by a modest 5.0% year-over-year as measured by the ICSC's tally of 22 major retail chains. An easier year-over-year comparison in October, combined with  underlying momentum and improving economic fundamentals helped sales, while apparel demand was pared by a warmer than normal month and weakened demand for seasonal goods. Hurricane Sandy’s impact was modest for the overall industry. Among merchandise categories, Luxury Stores led with a gain of 9.8%. Wholesale Clubs followed with a 7.0% gain. Department Stores rose 4.9%, Discount Stores were up 3.7% and Apparel was up 3.6%. Drug Stores dropped 4.7%. Among individual retailers, Gap gained 4.0%, and Limited rose 3.0%; Costco was up 7.0%. Nordstrom was up 9.8%; Target grew by 2.4% and TJX by 7.0%. Macy’s gained 4.1%, and Kohl’s rose by 3.3%; Rite Aid was down 1.1%...NCR Corp. will install 10,000 SelfServ Checkout lanes in more than 1,200 US Walmart locations in 2013.

Industry News: Accelerating

Eataly, the artisanal Italian food and wine emporium, will open its second US location, at The Shops at North Bridge in Chicago. Eataly opened its first US store, in Manhattan, in 2010…Signet Jewelers Ltd., parent company of specialty jeweler Sterling Jewelers Inc., is buying Ultra Stores Inc., operator of the Ultra Diamonds outlet stores as well as the jewelry departments in a number of off-price department stores…Williams-Sonoma’s West Elm will launch a neighborhood market format, West Elm Market, featuring home, garden, care & repair, and personal care items in Brooklyn NY, followed by 8 in-store shops across the country…GameStop is opening 80 US GameStop Kids stores aimed specifically at children. The stores will feature E-rated games alongside an assortment of related toys, accessories and collectibles...Health and wellness retailer LaVida Massage opened 13 new franchised units in 2012. Another 8 are slated to open in early 2013. LaVida currently operates 45 centers nationwide..Starbucks will open 1,300 net new stores globally in 2013, representing 22% growth over fiscal 2012. Starbucks is maintaining its growth target of approximately 600 net new stores in the Americas, with the majority of those in the US…America’s Taco Shop is expanding nationally. The concept, which has 6 restaurants in the Phoenix, AZ, area, will open a franchised unit in MD and 6 additional restaurants in for Miami, Arizona, California and Texas. The units range from 1,200 to 1,800 s/f…Apple Inc. will open 30- 35 stores in 2013...Vitamin Shoppe will open 52 new stores for fiscal 2013...Foot Locker announced SIX:02, a retail concept featuring fitness apparel for women. The first 3 stores will open for the holiday season in CT, NJ, and Texas…Restaurant chain Not Your Average Joe’s will grow to 50 stores in 5 years from Boston to Washington, DC. NYAJ operates 17 eateries New England, including 15 in MA.

Industry News: Decelerating

Build-A-Bear Workshop will close 50-60 underperforming stores in the next 2 years in an effort to reach its “optimal” count of 225-250 locations.The company said sales from stores with its new interactive design exceeded its expectations. The retailer is on track to have 6 stores open in the new format by the end of fiscal 2012.

Industry News: New England

Tilly’s, the west coast teen apparel specialty retailer, will open its first MA stores at the South Shore Plaza and Northshore Mall. Tilly’s has 159 stores in over 20 states…Whole Foods has an agreement to purchase six leases from Johnnie’s Foodmaster, the Chelsea, MA based family-owned grocery chain. The transaction includes the Johnnie’s stores in South Weymouth, Arlington, Charlestown, Brookline, Melrose and Somerville. Johnnie’s plans to shutter the 31,000 s/f stores in the 6 locations prior to the closing date. Johnnie’s will keep close all of its remaining stores. Whole Foods intends to remodel each location, with the goal of reopening all six stores before the end of its 2013 fiscal year. The deal brings the number of Boston Whole Foods stores to 26…Two major Boston-area malls seized by lenders are hitting the market after creditors waited nearly a year for conditions to improve. Mortgage servicer C-III Capital Partners hired brokerage firm Eastdil Secured to sell Taunton’s Silver City Galleria and Leominster’s Mall at Whitney Fields on behalf of the shopping centers’ lenders. There’s no asking price specified for either mall, which investors can buy individually or in a package with as many as 4 other shopping centers C-III is trying to sell in other states…Tatyana Designs opened its 10th Bettie Page store, on Newbury Street in Boston. Bettie Page, which targets 18-35 year-old, fashion-conscious women, specializes in contemporary designs inspired by the 1950's and the iconic pin-up star Bettie Page…Sun & Ski opened its second MA store in Woburn. The new 14,393 s/f store will carry ski and snowboard gear. The 32-year-old adventure retailer, headquartered in Houston, Texas, is looking at MA as a 4-5 store market…The Bill Rodgers Running Center, one of the first stores to open at the revitalized Faneuil Hall Marketplace in the 1970s, is closing after a 35-year run. Financial and personal reasons factored into their decision…Stop & Shop Supermarket Co. opened a store in Wayland, MA. The 45,000 s/f store is smaller than the typical superstore the Quincy-based company has been building as they reduce their footprint to fit into smaller spaces. Located at 400 Boston Post Rd., the store is LEED certified, and is expected to use up to 20% less energy than a typical grocery store of this size. It boasts the latest in energy efficient features and introduce free electric car charging stations, providing nine parking spots for electric cars. Other energy features include more than 600 roof-top solar panels which are expected to supply about 11% of the store’s overall energy needs and LED parking lot lights which will reduce energy consumption by 50% vs. traditional lighting and will save about 1.4% of the store’s annual electricity requirements…Charter Realty and Development Corp. has acquired the 52,000 s/f Towers Plaza for $8.6 million. The neighborhood shopping center, located in Melrose, MA, was originally built in 1965 and was later renovated and expanded. It is anchored by Johnnie’s Foodmaster Supermarket and Rite Aid. Charter anticipates a fa├žade renovation as well as upgrades to the common area...Stonewall Kitchen has opened its 10th company store in the Pheasant Lane Mall, the company’s 4th New Hampshire location…State and local officials recently joined Nordblom Co. for a groundbreaking ceremony on the first phase of the Northwest Park development in Burlington, a 285-acre business park off MiddlesexTurnpike which includes a planned 140,000 s/f Wegmans and 160,000 s/f of restaurant and other retail space...Shaw's Supermarkets will reduce its store workforce by 700 positions across 169 Shaw's and Star Market stores in New England…DSW will open in mall space once occupied by Filene’s Basement at South Shore Plaza, Braintree, MA…Panera Bread Foundation’s donation-based Panera Cares Community Cafe will open at 3 Center Plaza next year. The cafes’ mission is to serve each person who walks through the door, including customers who can’t pay anything. Menus at Panera Cares are consistent with those at Panera Bread’s for-profit restaurants, but have “suggested donation levels” in lieu of prices, and donation bins instead of cash registers...CarMax has acquired a parcel off the Norwood, MA AutoMile for $20 million with plans to build a showroom, a service center and a sales lot for 400 vehicles. The 115,000 s/f former Home Quarters on the site will be demolished.

October Retail Sales Report

Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0.

Commerce Department Monthly Sales

The Commerce Department said that sales dropped 0.3% after three months of gains. Auto sales fell 1.5%, the most in more than a year. Excluding the volatile categories of autos, gas and building materials, sales fell 0.1%.
  Source: U.S. Department of Commerce - commerce.gov

Treasury Yields

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had increased in September, improved again in October. The Index now stands at 72.2 (1985=100), up from 68.4 in September. The Present Situation Index increased to 56.2 from 48.7. The Expectations Index rose to 82.9 from 81.5 last month.

Source: The Conference Board - www.conference-board.org

Purchasing Managers Index

Manufacturing expanded in October as the PMI™ registered 51.7 percent, an increase of 0.2 percentage point when compared to September's reading of 51.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws