Tuesday, September 24, 2019

JC Penney: What Now?

For the better part of the past decade, JC Penney has been on a downward trend, experiencing a continuous erosion of market share to the likes of Target, Walmart, and Amazon, among others. It has gone through four chief executives, most notably Ron Johnson, who came over from Apple after transforming Apple retail outlets from boring computer stores to electronic gadget playgrounds. Unfortunately Johnson couldn’t successfully reboot Penney’s, and he proceeded to run the ship into the ground…well not quite, thanks to a returning Mike Ullman in 2013, who had held the position from 2004 until the hiring of Johnson in 2011.

Ullman’s stay was only temporary; he stabilized the company and then in 2015 another replacement was found in Marvin Ellison, a well-regarded Home Depot executive. With home improvement in his blood, he proceeded to introduce major appliances into the Penney mix - but he didn’t stick around long enough to find out if it was the right decision. He made a quick exit to Lowe’s in 2018. Perhaps he saw the writing on the wall, although he likely wanted everyone to believe he was heading back to his roots. So the search was on again, and in October 2018 the company hired a new CEO, Jill Soltau, for what could be a one last attempt to right the JC Penney ship.

After nearly a year of revamping the C-wing, Soltau now seems to have a team in place in which she has confidence. But in a pretty poor environment for department stores in general, she certainly has her work cut out for her. Penney has reduced inventory levels by 12.5% this past quarter, which has improved margins and led to lower permanent markdowns. Major appliances and in-store furniture categories have been removed from the merchandise mix, and an ongoing effort to strengthen the omnichannel strategy in order promote growth in e-commerce is also part of her plan.

The company has conducted extensive consumer research to reconnect with the customer, identify major issues facing the company, and rebuild a brand that can generate traffic growth, transform the customer experience, and improve customer retention. In-store there have been improvements to fitting rooms and upgrades to displays, particularly in women’s categories such as jewelry, handbags, shoes, and Sephora beauty. Stores have even added stylists to provide customers with personalized one-on-one service. To be quite honest, however, none of this seems like cutting-edge innovation.

Apparently stockholders don’t think so either. JCPenney’s stock price is down about 13% year-to-date, while the S&P is up about 20%. Currently, Penney’s stock price is below $1.00 a share and is at risk of being delisted from the New York Stock Exchange. Just last week Fitch downgraded JCPenney’s credit rating based on, as analysts said in an emailed report, “continued market share losses and declining EBITDA, with lack of visibility for a material turnaround although there are no near-term liquidity concerns.”

A headline from Footwear News this month read JCPenney Reportedly Headed Toward Debt Talks as Holiday Shopping Season Looms. The article went on to say that “the move would give lienholders and unsecured bondholders access to confidential company information as they continue to urge JCPenney to consider a swap or extension on its debt — valued at roughly $4 billion, according to filings with the U.S. Securities and Exchange Commission. It also buys the department store chain more time to get its business in order ahead of the crucial holiday shopping season.”

So what now for Penney’s? Many questions regarding the company’s fate remain unanswered. It seems that Q4 will be a critical period for Soltau’s efforts to take full effect and make believers out of investors again. But considering the vulnerability of department stores as a category, and the struggle of regional malls just to survive, Soltau’s future at JCPenney may not be any brighter than her recent predecessors.

Bob Sheehan, Vice President of Research

Photo courtesy of JC Penney


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