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[15 comments]

Is the J.C. Penney turnaround for real?

August 15, 2014

The J.C. Penney rebound continues. The department store chain posted a same-store sales increase of six percent in the second quarter. The company that many had left for dead following Ron Johnson's stint as CEO, still has some fight in it, now having posting sales increases for three consecutive quarters.

"Our turnaround initiatives continue to produce improved financial results. In the second quarter, we gained additional market share while significantly increasing gross margin in a highly competitive promotional environment," said Mike Ullman, Penney's CEO who returned to the company to replace Mr. Johnson in April of last year.

"With our unique assortment of powerful private brands, key national brands and exclusive attractions — all at prices customers can afford — we expect to continue driving profitable sales this back to school season," Mr. Ullman added in his statement. "As we approach the completion of our turnaround, we are focused on reestablishing JCPenney as the premier shopping destination for the moderate consumer."

While its same-store numbers appear impressive, it is important to note that Penney is going up against some historically weak comps resulting from many of the missteps that took place under Mr. Johnson.

However, it's clear that the mood at the department store chain is more optimistic than in the past. A concrete sign of that optimism is the company's decision to open a 124,000-square-foot store in Brooklyn, NY.

In a press release to announce the opening, Mr. Ullman said, "This location displays our commitment to mindful store growth in high potential markets, and will perfectly complement our other New York City locations in Manhattan, the Bronx, Queens and Staten Island."

Not everyone is convinced the chain should open new locations, even if they are set in a densely populated area and use 45 percent less energy than the typical Penney store.

Craig Sterling, an analyst at EVA Dimensions, told Bloomberg News, that Penney needs to close more stores than planned (33 are slated for closing) and should not be opening new ones.

"Their store closings aren't happening fast enough," he told Bloomberg. "J.C. Penney is the last company that should be spending money on growth."

FINANCIALS:     [NYSE:JCP] [ ]

Discussion Questions:

Are you a believer in the J.C. Penney turnaround? How do you feel about the new store expansion in Brooklyn? What must the chain do to build on the sales improvements made in the last three quarters?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How optimistic are you that J.C. Penney will get turned around?

Comments:

Johnson crippled the company. 6 percent over last year is good but it is still a long way to go. I would concur, J.C. Penney is the last one to be opening new stores, but it is an outward-facing decision, not the hard inward-facing one needed to close a bunch of stores.

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Bob Phibbs, President/CEO, The Retail Doctor

Count me as a skeptic, because the Q1 numbers were also met with the same "turnaround" narrative before analysts gave J.C. Penney's competitive posture a closer look. Yes, the 6 percent comp gain looks better than most, but is still 5 percent below (terrible) 2012 levels. Yes, the gross margin and SGA show worthy improvements over Q1 levels but the company is still losing money.

Until J.C. Penney can figure out how to drive gross margins into the upper 30s (not a stretch) and SGA closer to 30 percent (quite a reach), they are not going to deliver the sort of operating profit they need for the long haul. I continue to believe that the company needs to move faster on store closings, as well as finding a CEO who can do more than just unwind the errors of the Ron Johnson era.

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Dick Seesel, Principal, Retailing In Focus LLC

J.C. Penney can turn this around with the right merchandise and great promotions. If the service level gets better, then yes, they have a good chance of sticking around for many years. My wife likes their selection of goods, and finds good deals on name brand products she likes. They must keep the good stuff in the stores, at prices which will resonate well, and back-to-school clothes will be an indicator of the third quarter. We'll see.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

"Turnaround" to me does not mean that you had a good quarter. It means making the brand relevant again. So in that regard, they are a LONG way from turning that aircraft carrier (WWII vintage) around.

Two questions: 1.) How many stores did J.C. Penney close so far this year? 35? 40? and 2.) How do young people—our future shoppers—feel about shopping at J.C. Penney? I think we all know the answer to that last one.

It's easier to fudge your health if you ignore the future and just take markdowns to make your numbers. Not a believer.

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Lee Peterson, EVP Creative Services, WD Partners

Not yet. I think J.C. Penney was so beaten down that the gains are more a result of stabilizing their operations, which is bringing some of their existing customers back, rather than expanding their customer base with new ones.

I don't know their business well enough, but maybe the new store openings makes sense. If they are slated to close 33 stores, presumably due to under performance, opening a single store might not be such a bad idea if it can show growth. On that note, management has bought some credibility with the last three quarters, but that can quickly disappear if what they say doesn't materialize.

To hold onto existing gains, J.C. Penney needs to execute, execute and execute. While their horizon is looking brighter, they still have a long way to go to escape the stormy seas they have been experiencing.

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Bill Davis, Director, MB&G Consulting

The new store is just a charade. There is no turn around. Wow, six percent, but six percent of nothing isn't a whole lot. If J.C. Penney is still around in three-to-four years, I'd be surprised. The 1970s called and they want their stores back.

David Livingston, Principal, DJL Research

J.C. Penney is just getting back to zero. Eventually, the market will realize that this is not growth, it's just back to bad vs. heading into bankruptcy.

Still, I wish the company well.

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Paula Rosenblum, Managing Partner, RSR Research

Any retailer needs to manage its real estate portfolio continuously, opening, closing and renovating. I wouldn't make such a big deal out of new stores, I would worry if a retailer never closes anything, as leases come up or deals can be made to open some while closing others, that's just operational. Whether the chain as a whole will make it, well, who is going to win the next Superbowl anyways? Someone pass the popcorn over to my armchair, please.

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Peter J. Charness, SVP America, Global CMO, TXT Group

I am not as negative about the results as others posting. Does it erase all that preceded it? No. Does it mean it is time to laud them as the best ever? No. However, before wild success can occur, the company has to level set. Stopping the bleeding is the first step to healing.

I am not ready to say that all is well and they are out of the woods forevermore. However, that would not be said of ANY business. I am ready to say that they proved many of the experts that were picking up shovels prepared to dig their grave were premature.

Every salesperson has been told that the first sale is to him or herself. Similarly, if the employees of J.C. Penney see progress, it may reflect in how they feel about the company and they will perform at a higher level (success breeds success). Expansion (even one store) is a good sign to send to employees.

To build on these (minimal) successes, J.C. Penney needs to become unique and differentiated so that shoppers (young, old and in between) come to identify the store with "something."

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David Zahn, Owner, ZAHN Consulting, LLC

While this is an accomplishment to be applauded in the short term, it must be viewed with a longer lens. Why were the comps down so much under Ron Johnson? Because he, with the board's support, consciously took the company down a path of reinvention.

Before his tenure, JCP was a dinosaur looking up at the meteor, just waiting for it to fall: revenue was shrinking, relevancy was null, and had no place in the retail future. He focused on the monumental task of reinventing the company, making it a brand again, and trying to capture a customer base that would be around for a few years.

Reinvention is not easy, and is costly. We all look at Apple today and see a paramount to follow, and yet, even under Steve Jobs' leadership, the company made massive missteps, with ungodly costs. At one point, Apple stock was practically laughable. It required patience, perseverance, and faith, and now we know them to be the massive retail and brand they are today. Ron Johnson had taken the first hard steps towards that with JCP, and had already actually proven the philosophy was sound (look at the $/square foott of the few stores he was allowed by the board to radically make over), but there were too many changes, too fast, for the JCP culture.

So now, we see a "turnaround," and that's a worthy celebration indeed. But is it a turnaround? The comps that are being beaten are from the darkest point of the reinvention cycle, artificially depressed by a company's long-term strategic goals being prioritized over short term profits. It's like taking a huge write-off for acquiring a brand and not reflecting those costs in your financial statements: it's irresponsible to not give your investors and some surprisingly lackadaisical financial reporters the full story.

And one last point: in the end here, we are celebrating JCP returning to where they were. They have reverted many of the key policies that started to make them different, and retreated to the familiar and comfortable. They have kept very few of the Ron Johnson innovations, while indeed rousing from their previous malaise and at least making the effort (the Brooklyn store is a very savvy move, for instance). But the question remains: are they still looking up at the streaking meteor with their fellow dinosaurs, or will they embrace evolution to their core, and find the customers that will join them?

Joshua Tretakoff, Managing Partner, TStone Associates

I believe that JCPenney has "stabilized" after the whirlwind, but that doesn't change the fact that they were stagnating before it. This is a brand in need of a make-over and right now they are simply maintaining the status quo.

Growth? Heavens no! I would like to see JCPenney go back to some of the ideas Ron Johnson had in mind and learn from them. Though the execution was poor, the ideas were on target to revamp this American Icon.

While you've got the staff's mood upbeat, is a great time to try new things.

And that's my 2 cents!

Lee Kent, Brings Retail Executives Together to Meet.Learn.Profit, RetailConnections

The observations of David Zahn, above, resonate with me. I'm not negative about Penney's, not ready to say they're out of the woods (or moribund), think they might have some good reasons to be positive, and they should differentiate and recognize who their audience is. PS: Remember that brick-and-mortar stores are remaining in favor as a result of webrooming and other technological and omni-channel developments they're using to stay relevant with shoppers.

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Naomi K. Shapiro, Strategic Market Communications, Upstream Commerce

For those of us living in cities especially, there is a role for department stores, and cities and inner suburbs may be good places for such stores. So the Brooklyn opening makes sense to me.

That being said, given the impact on e-commerce on shopping, and the increased reliance on e-commerce by younger demographics, all department store chains, especially the laggards (Sears too) have to figure out how to remain/be relevant going forward.

I sure do not envy the people who have to figure this out.

Richard Layman, Consultant, Retail Empire LLC

Like everyone else here, I greet this more with polite tea party clapping than wild applause: sick is better than dying—and certainly better than dead—but it's still sick.

As for Brooklyn, while I don't know enough about it to comment on the specific location—and listening to people "who don't know enough to comment" is the last thing I would recommend JCP do—the idea that they shouldn't open stores because "they have too many" is nuts: it's not that JCP has too many stores, it's that it has too many bad ones and too few good ones; shrink the former, yes, but grow the latter as well.

'notcom'

A six percent increase with a zero base still equals nothing. Penney's is not making money and will never make money again. Stick a fork in it, cause it's done!

Ed Dennis, Sales, Dennis Enterprises

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