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J.C. Penney’s Makeover Is Far From ‘Genius’

Struggles continue, and JCP must act fast to stop the bleeding


“Genius is an infinite capacity for giving pains,” Oscar Wilde once wrote. That just about sums up how J.C. Penney (NYSE:JCP) shareholders are starting to feel about CEO Ron Johnson’s strategy to transform the struggling 110-year old retailer by fusing competitors’ merchandising and pricing strategies with the vibe of Apple’s (NASDAQ:AAPL) “Genius Bar.”

Just six months into Penney’s extreme makeover, one thing is abundantly clear: Ron Johnson’s experiment is not going well. Last week’s sudden departure of JCP President Michael Francis, the highly regarded former Target (NYSE:TGT) executive charged with drawing up a new merchandising and pricing strategy to compete with Wal-Mart (NYSE:WMT) and others, is just the latest tremor to shake the retailer since it unveiled its new strategy on Jan. 25.

In a tersely worded statement, the company said little more than that Johnson is assuming Francis’ duties and will not seek a replacement.

However, Johnson was more candid about the changing of the JCP guard in an interview with Women’s Wear Daily’s David Moin: “The marketing I largely left to [Francis],” Johnson told the fashion industry newspaper. “The fact that it hasn’t resonated — I had to get involved.”

Francis’ departure was the company’s second high-profile executive exit in the past 70 days. CFO Michael Dastugue, a 21-year JCP veteran who had held the CFO job for only 15 months, left the company in mid-April.

So last month, it fell to his interim replacement — COO Mike Kramer — to help Johnson explain JCP’s colossal first-quarter earnings miss. The company reported a $163 million loss compared to a $64 million profit for the same quarter last year — more than double the loss analysts had expected. The top line was ugly too — the $3.2 billion revenue is 20% lower than last year.

And it gets worse: Same-store sales during the quarter fell by nearly 19%. Its margins and store traffic also fell markedly.

After hitting a 52-week high of $43.13 two weeks after Johnson unveiled the new strategy, shares have hemorrhaged half their value. JCP currently is trading around $21.50 — having dropped 4% since news of Francis’ exit broke last Tuesday. Plus, another pain for investors: JCP suspended its dividend.

Penney’s performance was hardly what Johnson had in mind when he and Francis launched the extreme makeover at a posh party in Manhattan in January. That makeover included taking a page from Target’s playbook by launching new budget collections from designers like Nanette Lepore (whose real brand graces the racks at Neiman Marcus) and featuring Martha Stewart’s home collection.

Penney stores would also be revamped to look like the retail stores Johnson launched at Apple — including a variation on the tech retailer’s “Genius Bar” concept.

But at the core of Johnson’s transformation strategy was JCP’s new three-pronged “Fair and Square” pricing scheme: Everyday regular prices, Month-long Values and Best Prices available on the first and third Fridays of every month. JCP customers traditionally have been attracted to the retailer’s many sales and coupons; Johnson believes they need to be “weaned off” of those old habits and retrained to buy products at “everyday” prices.

JCP planned to pony up $80 million a month to advertise the new pricing scheme, the centerpiece of which were TV ads featuring comedian and talk show host Ellen DeGeneres. But many customers found the ads confusing and the absence of sales and coupons were a good reason to shop elsewhere.

The company has since reintroduced the once taboo word “sale” into its vocabulary, replacing Month-long values.

Bottom Line

Johnson remains committed to his strategy, attributing the early disappointments to a failure to “communicate pricing strategy to customers.”

But here’s the thing: Customers loved the sales and the coupons — and Johnson himself admits that they “were a drug” that drove traffic. But that hasn’t dampened his determination to force JCP shoppers to give up their coupon addiction and go cold turkey.

Forcing change is an epic achievement — if you can accomplish it. The task is far easier if you’ve cornered the market on a hot tech toy like an iPod or iPad. Johnson had that advantage when he was in the fast and frenzied process of launching Apple Stores. He doesn’t have that edge at Penney.

It’s only logical that shareholders are getting more than a little antsy about Johnson, who was paid a whopping $53 million last year simply on the promise of turning the company around, as InvestorPlace Editor Jeff Reeves discusses here.

Trying to make consumers “realize” that what they want to buy and how they want to buy it is wrong is at best like herding cats. Shareholders will be better served if Penney’s “Genius” hits “pause” on his new mantra and replays that time-tested retail motto: “The customer is always right.”

But until that happens, I’d avoid JCP and all the pains that go with it.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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