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JCP’s Turnaround Strategy: Turn Back the Clock to Better Days

J.C. Penney’s (JCP) turnaround strategy is a bold attempt to turn back time and return to its once proud days of profitability. At the heart of this model is the push to reinvigorate private labels and recapture its core shopper, frugal and value-driven.

Much of Ullman’s turnaround strategy for JCP amounts to a grand undoing of the damage wrought by former CEO Ron Johnson’s disastrous tenure. Johnson deemphasized promotional discounts, reinvented the home department to focus on more expensive designers and brands and reorganized stores so products were grouped by brand rather than category. To that end, JCP has been winding down its controversial deal with Martha Stewart, which Macy’s alleged was an infringement on a preexisting arrangement it had with her company, promising exclusivity.

Starting in January, JCP started to decrease its offerings of its own jcp menswear collection, Martha Stewart home furnishings and Joe Fresh apparel. The new store space will be devoted to private-label brands that have proven more profitable over the last two years like JCP Home and Cooks, St. John’s Bay clothing and Ambrielle lingerie.

Many experts believe that JCP’s hopes for recovering lost customers depends on reintroducing lost-cost brands that are immediately recognizable. Bernard Sosnick, an analyst at Gilford Securities said, “A retailer in need depends on shoppers who know it well to begin a recovery. Other shoppers won’t come for quite a while.”

The changes planned by JCP leadership are many. In an effort to squeeze more sales from its existing brands, they will be adding sportswear apparel to its J. Ferrar line of suits. And in an effort to replace the home goods products lost with the departure of Martha Stewart, they will also be expanding their Liz Clairborne brand to include towels and bedding. JCP will limit its selection of home goods from Michael Graves, which has languished.

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Ullman seems keenly aware that time is of the essence. He said, “We don’t have six or seven years to get our business back. Half of our business has to be brands that we can produce profitably.”

On a conference call discussing JCP’s fourth-quarter earnings report, Ullman parsed the retailer’s recovery plans into three elemental parts. He said the strategy “would come in three phases: the immediate stabilization phase, followed by a phase rebuilding and then the go-forward phase positioned JCPenney for long-term growth. Over the last 10 months, we completed the first two phases of our turnaround in a very tough and highly competitive environment and this year [we are] progressing [the go-forward] phase.”

JCP hopes that eliminating brands that fail to stimulate sales, replacing them with its own private brands, will improve narrowing gross margins. Gross margin the fourth-quarter fell to 28.4%, down from 29.5% in the previous quarter, albeit an improvement over last year’s 23.8%. Ullman said, “We decided after we had given the guidance that as we thought about the go-forward phase, if we really want to finish off the rebuilding phase, let’s put behind us the things that the customer really doesn’t expect to see in JCPenney. So that did affect our margin and that explains the difference.”

Lately, JCP’s ailing empire has shown some promising signs of vitality, buoying the spirits of anxious investors. According to a JCP spokesperson, the retailer increased its sales in November by 10 percent, registering a jump in same-store performance numbers for the second consecutive month. October was also touted by the company as evidence of an increasingly successful turnaround strategy; sales jumped 0.9% for October, a substantial improvement in light of the fact that September suffered a 4 percent decline. A company spokesperson said that the stronger performance was largely attributable to improved inventory in central private brands as well as an overhaul of the home goods department.

Also, JCP finally enjoyed its first positive quarterly sales report since 2011. On February 4, the retailer announced that its same-store sales rose 2 percent for the fourth quarter.

In the nine weeks running through November and December, JCP’s same-store sales increased 3.1%. It experienced particularly brisk performance in activewear, outerwear, dresses, boots, men’s clothing, luggage and housewares.

Ullman spoke enthusiastically of the results. “While 2013 brought a lot of change and challenges to J.C. Penney, the steady improvements in our business show that the company’s turnaround is on track. In spite of the significant headwinds facing all retailers this season, including unprecedented harsh weather conditions in many parts of the country, we delivered on our promise to generate positive comparable store sales growth in the fourth quarter.”

While there were per share losses for JCP, they were more modest than most industry forecasts. Instead of the $0.85 per share experts expected, the retailer only lost $0.68 per share. Right before JCP posted its fourth-quarter results on February 25, its shares jumped 6 percent in anticipation of optimistic news. After the results were made public, shares rose another 12.4%. Nevertheless, revenue for the quarter skid to $3.78 billion down from $3.88 billion a year ago. Also, JCP reported a full-year operating loss of $1.42 billion. In 2013, same-store sales were down 7.4% and overall sales dropped 9 percent.

JCP’s designs on the future turn on a revival of its storied past, producing its own discounted brands, luring in throngs of value-hungry consumers. While other retailers look to reinvent themselves to accommodate the rise of fast fashion and the new focus on omnichannel, JCP’s deepest wish is to become what it once was. Defying skeptical critics, Ullman expressed optimism about the company’s prospects for success. “Today, the most challenging and expensive parts of the turnaround are behind us and the work we did in 2013 has laid a foundation for continued progress in 2014.”