JCPenney Turnaround Falters

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On January 25, new JCPenney (NYSE: JCP) CEO Ron Johnson, former head of Apple’s (NASDAQ: AAPL) retail operations, unveiled his vision for the retailer’s turnaround. His “Fair and Square” price plans would make it easier for shoppers to work their way through stores to find what they wanted without price confusion. The company also offered a new line of brands. The programs seemed a reasonable approach to bring in customers. That only lasted for a few days. When Wall St. started to examine the new plans, it did not like what it saw. The turnaround, at least as far as many investors are concerned, has no future.

The Fitch rating agency cut JCPenney’s Issuer Default Ratings to BB+ from BBB-. It did not take long for Fitch to decide:

The ratings reflect significant execution risk for J.C. Penney over the next 12 – 18 months as the company rolls out its new pricing and promotional strategy and addresses fundamental areas such as merchandising, costs, and investments in its store base. Fitch views many aspects of the new strategy as strategically sound and believes the company should be able to take costs out of the system to fund increased investments. However, the jury remains out on whether consumers will buy into the new pricing structure and whether or not the company can turn around faltering sales and sustainably improve the profitability of its business.

Put another way, Johnson’s plans have little chance to succeed. The worries are reflected in JCPenney’s share price, which rose when Johnson announced his plans but has remained flat ever since. As a matter of fact, over the past year, JCPenney shares have done no better than the DJIA, while shares of rival Macy’s (NYSE: M) are higher by more than 50%.

The trouble with JCPenney is that it needs a turnaround at all. It has a place on the bottom wrung of large retailers, along with Sears and Kmart. It has become marginalized as competitors that include Target (NYSE: TGT), Kohl’s (NYSE: KSS) and Macy’s have moved ahead. And, of course, it is the victim, as are all bricks-and-mortar retailers, of (NASDAQ: AMZN). The online retailer continues to grow at a remarkable pace, even as it spends down margins to take business from competitors.

JCPenney is not likely to do well as it tries to right itself. Its new merchandising policy does not have the elements likely to pull customers from other department stores. Those customers left too long ago.

Douglas A. McIntyre