Marvin Ellison, Chairman & CEO, J.C.Penney – Photo: J.C.Penney
Has J.C. Penney pulled off ‘one of the greatest financial turnarounds in retail history’?
Speaking last week on an earnings call with analysts, J.C. Penney CEO Marvin Ellison said the department store chain had pulled off “one of the greatest financial turnarounds in retail history.” While Mr. Ellison admitted (via Seeking Alpha) that there was no reason to be “satisfied with where we are as a company,” he said Penney had defied “conventional wisdom” that predicted its failure back in 2013.
The retailer reported positive net income for 2016, achieving a $514 million increase over 2015. Comparable store sales for the fourth quarter were down 0.7, which Mr. Ellison attributed to a slow start in November. He said comps in December and January, not part of the report, were positive.
The chain announced it would close up to 140 stores. Mr. Ellison said closing locations would improve the “brand standard of J.C. Penney and allocate capital more efficiently to a smaller base of stores.”
He identified five initiatives that are key to Penney’s turnaround.
The first is the company’s beauty strategy, primarily built around Sephora. Penney will add 70 new shops to stores this year while expanding space and assortment in existing shops. There were 577 Sephora shops operating inside Penney stores at the end of 2016.
The home category is also an area of growth for Penney. The chain announced it would add 100 new appliance showrooms in stores early this year. Penney, which currently operates 500 showrooms, is focused on capturing share from Sears.
Omnichannel is also key. Penney’s CEO expects online sales to exceed 20 percent of the chain’s total within five years and believes in-store fulfillment can drive top line growth while reducing costs.
Data-driven pricing is the fourth key initiative. A test in 2016 produced improvements in sales and gross margin.
Finally, Mr. Ellison expects women’s fashion, particularly activewear and plus sizes, to boost sales. Nike products will be in all Penney stores by the end of the first quarter and Adidas will be in over 400 locations by back-to-school season. Penney plans to expand selection in its plus-size boutiques to include swimwear and accessories.
Discussion Questions
DISCUSSION QUESTIONS: Do you agree with Marvin Ellison that Penney has defied “conventional wisdom” to pull off “one of the greatest financial turnarounds” in the history of retailing? Which of the five key initiatives outlined by Mr. Ellison – beauty, home, omnichannel, pricing, women’s apparel – do you think are most important to the chain’s success going forward?
Poll
BrainTrust
Bob Phibbs
President/CEO, The Retail Doctor
Phil Masiello
Founder and CEO, CrunchGrowth Revenue Acceleration Agency
The J.C. Penney team has made good progress and appears to be on the right track, but negative comps and closing 140 stores hardly seems like “one of the greatest financial turnarounds in the history of retailing.”
Yes, the turnaround is definitely impressive at a time when retail is under intense pressure — financial and competitive. “Hacking” their retail business is smart. Test out new products, categories and areas, then make quick decisions on whether they are a success or not. You stop doing the losers, and double down on the winners.
Long term, the omnichannel initiatives are going to suit J.C. Penney best. This is a long-term strategy that adapts to the four shopper generations in the market today. It also embeds the J.C. Penney brand in the shopper’s mind, whether the shoppers are in-store, at a mall, dialing in, online or on their mobile. THAT’S effective branding/retailing for the long term!
This sounds a bit like “Mission Accomplished.” Climbing out of the hole Ron Johnson created is good, but it’s far from winning the marathon race that is retail in a hyper-fractured stay-at-home market.
Look where the brand was five years ago and where it is now. Did they address the fact they are located in a lot of second- and third-tier malls with chains pulling out daily and with traffic slowing? Ulta is gaining on beauty so Sephora may not be the goose that laid the golden egg for long.
While Mr. Ellison was able to make encouraging announcements to analysts, J.C. Penney is far from “turning things around” and certainly a long way from being out of the woods. Of the five initiatives put forth, I would offer that beauty and in-store fulfillment are valuable approaches. In order for these initiatives to be successful, however, the visibility to inventory and addressing out-of-stocks must be addressed. If Sephora can ensure all products are in-stock and align those stock levels accurately on their website they can build a lucrative recurring (and revisiting) client base.
I think it is too soon to tell if this is true or not. They are still closing stores to shore up the finances. But I don’t consider retreating to be a turnaround. We have to now see if they can grow the business.
Omnichannel marketing is certainly a must for any retailer. But the question I have about J.C. Penney is, what do they have that no one else has? They have no competitive advantage in any category outlined. I can buy Nike products in many places as well as Sephora’s entire product line. Why should I go to J.C. Penney? That is the question they should be asking.
So yes, they have gotten to a short-term profitability. But can they continue it and prosper? Not until they figure out what they truly stand for. Those five elements are tactics, not strategy.
It’s admirable that J.C. Penney has stopped bleeding cash but its net earnings in 2016 were just over $1 million (not the EBITDA number, which was higher). So it’s premature to declare a historic victory in light of store closings and soft sales. The slippage in gross margin in 2016 is another area of concern, because competition won’t be any easier in 2017.
With those reservations in mind, Mr. Ellison has had his eye on the ball ever since assuming the CEO chair and continues to focus on the right things — data science, expense controls, driving sales opportunities and weeding out unproductive locations.
I’m the wrong person to ask about J.C. Penney … I thought that improving the look of the stores and adding beautiful new merchandise at great prices five years ago was a good idea.
In the short-term, cutting costs and closing stores can increase the bottom line. This is not a long-term strategy and is hardly sustainable. You can’t cut to ZERO. As long as revenues are moving in the wrong direction, the bottom line is is not the critical issue, the critical issue is a sustainable business model.
Translation: I’m not Eddie Lampert and J.C. Penney isn’t Sears — yet.
As a strategic market communicator for a retail intelligence company whose specialty is the science of price optimization through predictive and dynamic pricing, I am always surprised when data-driven pricing doesn’t get noticed as a driving factor in a company’s success. Pricing is everything when it comes to sales and gross margin, the spine of retail — or any business for that matter.
The department store segment continues to struggle. Despite the progress at J.C. Penney, there is still a long way to go before declaring success.
Earnings calls are usually the worst place to get information. They are full of innuendo and lack facts. We really need to look at their performance over a three-year period. Any retailer can alter the accounting for a short period of time. For two or three years they can’t. Since I haven’t been in a J.C. Penney since about 1980, I can’t really give an opinion on what will work best for them.
Wait, is J.C. Penney doing well or is Sephora doing well? I’m confused. Is the strategy for turnaround evolving the company into a real estate brand? Or, I should say, a better one? The greatest turnaround ever would’ve been keeping Ron Johnson, in my opinion, but that’s for another day. If anything, J.C. Penney is in line for more right-sizing. At least until they fill their former “stores” with hotter brands. I wonder if Marvin’s talked to Warby Parker yet. Bonobos?
J.C. Penney is still alive. Smaller and still getting smaller in order to show a profit on less sales dollars. This is very typical of what you get when accountants run a company through the operations department. The mistake is they are still turning away from marketing and sales for the purpose of addressing the needs of the base and searching the market for safe and reliable new revenue sources otherwise known as customers. So what we could really be seeing might liken itself to demolition drivers with a new set of brakes.
Talk is talk. And talk can be cheap. I do hope they have started to turn the corner. I don’t think closing 140 stores is indicative of getting more customers in the remaining stores. My guess is those remaining customers are going elsewhere. But if they do stay and new customers come in, the staff needs to make a big change in the understanding of the importance of a customer.
Calm down Marv. A (smart) miler doesn’t celebrate after the first lap, particularly when he/she isn’t even in first place. Penney’s did what it had to do to survive, and it made it, at least for now. But returning to what it was — a stagnating retailer — is no cause for celebrating. And people with memories that go back further than a few days might wonder what became of the “we’re not going to do mass-closings” talk. Was it just talk? And if so what purpose did it serve? Or has something changed?
It’s far too premature for Marvin Ellison and the J.C. Penney team to declare any sort of “mission accomplished.” While the brand is in a far better position than it has been in years, these are simply the first steps in developing a sustainable model to be relevant, in a continuously evolving retail marketplace.
For a department store such as J.C. Penney, the investments in an omnichannel model will provide the most dividends. Particularly, in a universe dominated by Amazon, the advantages of leveraging the retail stores as both a showroom and fulfillment center will be critical in the coming months and years.
When a major retailer has stood over the top of the abyss, looked down, and then set a course that is taking them in a direction of recovery, such as J.C. Penney is in the early stages, they are on the road to making a turnaround financial for retail history. Marvin Ellison has the JCP team running fast. They are running with their heads UP, with a great deal of pride.
The results thus far demonstrate that they are driving toward greater success. Adding 70 new Sephora stores to the current 570 is great timing. Based on Prosper Consumer Equity Scores, a rolling three month average of store preference on a year over year basis, Females, 18-34 are indexing at +128 in choosing Sephora. JC Penney Shoppers are indexing at +135 in their choice of Sephora YoY.
In addition, Sephora outpoints all other department stores for reasons to shop their experience — their shoppers give Sephora higher grades than Macy’s shoppers for shopping at Macy’s in areas of selection, quality, brands available, service, unique products, easy to navigate website, store appearance, and trustworthy retailer. Further, the Sephora shopper provides higher ratings for their shopping experience than Amazon shoppers of HBA on each of these items other than price and an easy to navigate website. Sephora closed the gap on the latter point on a YoY basis.
The move to expand appliances is a winner, as well. Over the last 90 Days, 24.0% of JCP shoppers have shopped online for appliances, while 1 out of 3 have shopped online for apparel, 16.2% have shopped online for home decor, and 15.8% have shopped online for beauty care. Fully 30.2% of J.C. Penney shoppers regularly purchase online and 62.1% occasionally do so. Only 7.8% of the J.C. Penney shoppers have never purchased online. Note the link to the omnichannel drive that Ellison and team are addressing.
Never an enjoyable experience to close 140 stores, or even one store. Tough minded decisions have to be made. The JCP team is taking those decisions on, addressing them, and making the right moves. Don’t count them out.
No, I do not agree.
Marvin is blessed by Johnson’s right sizing of JCP revenues during a time of austerity. JCP lost ~$7.5B in rev past 10 years, $4.8B in past 5. Since taking over from Ullman, he’s maintained a “claw back” of business from those that walked in the past.
As with all the department stores, the challenge is that the assortment is no longer relevant. So to me, the key initiative will be merchandise related and that will be beauty, women’s and home. Her and then her home. Channel of transaction is second. The brand must be relevantly built to drive preference/traffic. They can learn this from Sears.
There will be revenue opportunities when Sears eventually goes away. The pivot to home might be smart. But must be her store first.
Financially, I think it will be massive store closings and store footprint rationalization that will keep the brand going forward.
Beauty is a great focus for J.C. Penney, but I have my doubts about the housewares category. If the evolution of retail has taught us anything, it’s that when retailers try to get their hands in every market, they end up successfully alienating themselves from their key demographic. J.C. Penney should pick a focus and run with it.
I definitely agree, what Marvin and team have done definitely defies “conventional wisdom” and it took making some truly bold moves to make it all happen. That being said, I think it is a combination of moves that will help them continue to defy conventional wisdom in the future and it’s more than the five initiatives outlined above.
While I do think that J.C. Penney has unlocked something very special in the beauty space with Sephora and has leveraged omnichannel in some very interesting ways, I think that personalization will be a major driving force for them over the next few years.
The big question is — how can J.C. Penney provide consumers with a better experience in the stores they are keeping? When consumers read about stores closing it can be easy for them to think that the stores are going away for good. What will really impress consumers is to walk into a store and have a different and better experience than they had the last time they went there.
A move like this could really inspire consumers to see the brand in a new light. With companies like Bonobos and ModCloth opening new stores across the country there is a lot that J.C. Penney can do to learn from these new brick-and-mortar startups to help inject new life into their in-store experience.
Modest success for one quarter does not make for a “turnaround” let alone the “greatest one ever!” J.C. Penny has a ways to go to complete the turnaround, but curious that they are crediting a success store in a store concept with Sephora as the basis for that turnaround. Sounds an awful like what Ron Johnson said they needed to do 5 years ago….