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Ron Johnson Pushes JC Penney to the Brink but is Staying the Course

JC Penney’s CEO Ron Johnson is facing a difficult landscape. With same store sales down 26.1% in Q3 (the third consecutive quarter of same store declines), Johnson’s firm is rapidly running aground. The results were accompanied by more grim cash hemorrhaging – a loss of $123 million, in three short months.

Johnson’s response? Full steam ahead. In his speech to investors, Johnson promoted the (scattered, difficult to locate) successes of the chain’s turnaround plan. The extensive renovation plan at the company’s stores, which reorganizes them around a “Main Street” format of store-in-store locations and a central common area, is “gaining traction,” with customers. Sales productivity is “surpassing our own expectations.”

All well and good, but what do the numbers say? The company’s stock is down nearly 50% since it peaked in February. Online sales have collapsed 37.3%, even as other retailers have seen 20-30% growth in online sales, in the same period. Sales productivity may be up, but the kind of productivity gains needed to compensate for the double digit decline in store traffic exist only in Johnson’s fantasy-land.

According to Johnson, it’s all part of the plan.

For outside observers, the obvious culprit is the chain’s floundering “Fair and Square” pricing model. The model eliminated over 600 sales and coupons and replaced them with a three tier system of continuous discounting, month-long sales, and periodic clearance events. In a nod to the fumbling attempt at reshaping consumer expectations, the company is offering a Black Friday sale. But it’s not even fully committed to that. It plans to start the sale at 6am on Friday, while other retailers have pushed theirs back to 8pm on Thursday.

Johnson, who crafted the landmark Apple store design, was widely seen as a Panacea for the struggling retailer. Unfortunately, JC Penney is not Apple. Unlike Apple, which used high demand for its unique products to familiarize customers with a new retailing model, JC Penney does not have any must-have products. In all but a handful of markets, customers who find the new model difficult or unrewarding can simply make their purchases elsewhere.

Johnson’s store redesign is having more success, though it may not compensate for the failure of the discounting model. At stores that have undergone renovations (which are moving ahead rapidly), the company is making sales of $269 per square foot, compared to $134 in older stores. Unfortunately, only 10% of stores have completed renovations.

Finishing the remaining 90% is expected to cost $1 billion and take three years. If losses continue at the rate of the last three quarters, the company may find itself in a cash crunch. It has a $1.5 billion credit line, and $500 million in cash, but it needs that money for the transformation process – it can’t be using it to finance operations.

The firm’s largest shareholder continues to support Johnson, who may yet emerge as a retailing genius (if the company doesn’t go broke). With his support, it’s possible that JC Penney may have access to additional unreported capital in the form of a direct contribution. Additionally, Johnson, wealthy from his time at Apple, could choose to put his own money into the game.

If Johnson is successful in reviving the legacy retailer, it will likely only happen through slimming the company down. The company could liquidate real estate assets – an increasingly viable option as the market recovers and consumer demand rebounds. That money could finance a more rapid transformation of high-traffic stores and underwrite more designer collaborations. But the move would represent a setback for Penney’s, which, at this point, stands to miss out on the economic growth analysts are predicting for 2013 and 2014.

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