JCP - JC Penney

[PlanMaestro]

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.

 

- Chesterton's fence in "The Thing, Chapter 4, Why I am a Catholic"

 

I worked in corporate strategy for a department store and I think there are many reasons to be skeptic of Johnson's plan. There is a chance, but the odds are heavily against him. Besides, it looks to me that he learned not just good things at Apple. The following quotes remind me of someone's reality distortion field:

 

"We will put a big bear hug around middle America, and take them to a place they never thought they could get to. Middle America appreciates great design."

 

"If you put the customer first, you don't care where they buy, but you do care that they buy. You can't put pressure on them...you have to look into their heart, not their pocketbook,"

 

"between an online-only store or a brick-and-mortar retailer, "I take a physical retailer in a heartbeat"

 

“He said he is bullish on physical retailing, and predicted that online retailing, just like catalog shopping a few decades ago, will eventually reach a plateau. He said different categories of retailing will level off at different points, and that ‘the physical store will have a permanent place.’

 

There is a place for all that and it is called specialty retailing, where speed and flexibility are key therefore stores are much smaller than Penney's  and the mortality rate is higher. A place of darwinian forgiveness.

 

He is fighting battles of a higher order of magnitude than for example The Gap. I would put this turnaround in the cold as Dante's hell category, and if I decided to invest I would check very carefully the margin of safety provided by the real estate, cheap leases, and financial structure ... they might need all the help.

 

 

 

 

[txlaw]

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.

 

- Chesterton's fence in "The Thing, Chapter 4, Why I am a Catholic"

 

I worked in corporate strategy for a department store and I think there are many reasons to be skeptic of Johnson's plan. There is a chance, but the odds are heavily against him. Besides, it looks to me that he learned not just good things at Apple. The following quotes reminds me of someone's reality distortion field:

 

"We will put a big bear hug around middle America, and take them to a place they never thought they could get to. Middle America appreciates great design."

 

"If you put the customer first, you don't care where they buy, but you do care that they buy. You can't put pressure on them...you have to look into their heart, not their pocketbook,"

 

"between an online-only store or a brick-and-mortar retailer, "I take a physical retailer in a heartbeat"

 

“He said he is bullish on physical retailing, and predicted that online retailing, just like catalog shopping a few decades ago, will eventually reach a plateau. He said different categories of retailing will level off at different points, and that ‘the physical store will have a permanent place.’

 

There is a place for all that and it is called specialty retailing, where speed and flexibility are key therefore stores are much smaller than Penney's  and the mortality rate is higher. A place of darwinian forgiveness.

 

He is fighting battles of a higher order of magnitude than for example The Gap. I would put this turnaround in the cold as Dante's hell category, and if I decided to invest I would check very carefully the margin of safety provided by the real estate, cheap leases, and financial structure ... they might need all the help.

 

Interesting perspective, Plan. 

 

Yes, I think that runoff scenario is key here, as with some of these other companies that we discuss on the board (RIMM, SHLD, etc.).

 

But what do you think of the notion that by being a space for specialty retail stores, JCP takes some of the risk out of being killed by the substantial change occurring in the retail industry? 

 

To take the Apple analogy a bit further, it seems to me that JCP is trying to become a "curated" space for specialty retailing.  There will be staple stores owned by JCP and partners -- analogous to the built in apps that everyone uses on their iPhone and the most popular apps, such as Google Maps and YouTube -- and a changing mix of specialty stores fitting within relevant categories based on customer interest and JCP's take on which of these stores are providing great design at great prices to the end user -- akin to featured apps in the App store.

 

The interesting thing about the reality distortion field that Ron Johnson is clearly vibing is that although everyone realizes that some of the stuff presented is wacky, it may be inspiring to personnel.  I wonder if Johnson will be successful in inspiring his staff to get this turnaround done, unlike say an Eddie Lampert who seems to have an attrition problem.

[maxprogram]

As a shareholder, I put 0% weight into any type of run-off situation or play on real estate.

 

I agree that the situation is similar to Sears (T-10 years) and that's the real reason the Sears investment hasn't worked so far: it has been treated as a slow liquidation and investors have overestimated the value in that scenario.

 

Value of JCP real estate is probably around the current price or higher, but it would take many years (like Sears) and lots of headache along the way. This is why I don't think any current shareholder of JCP should have real-estate-monetization as any part of their thesis. If this scenario starts to play out, I will (gracefully) admit defeat, and move on.

 

Even @ $20 you are no doubt betting on a turnaround. It is essentially investing in a retail startup, with the following differences:

 

Advantage: great (experienced) senior managers; sufficient financing 2+ years out; existing good locations; existing supply/distribution.

Disadvantage: bureaucracy; prior brand association.

 

Can the advantages overcome the disadvantages? Johnson et al could have easily started a truly new retailer from scratch -- they have more than enough money and connections. But they chose to use JCP instead, probably for a good reason. Time will tell if they made a good choice.

 

EDIT: I tackle the pricing hiccup in this post: http://www.futureblind.com/2012/07/jcpenney-a-transformation/ if anyone is interested.

[PlanMaestro]

But what do you think of the notion that by being a space for specialty retail stores, JCP takes some of the risk out of being killed by the substantial change occurring in the retail industry? 

 

To take the Apple analogy a bit further, it seems to me that JCP is trying to become a "curated" space for specialty retailing.  There will be staple stores owned by JCP and partners -- analogous to the built in apps that everyone uses on their iPhone and the most popular apps, such as Google Maps and YouTube -- and a changing mix of specialty stores fitting within relevant categories based on customer interest and JCP's take on which of these stores are providing great design at great prices to the end user -- akin to featured apps in the App store.

 

The interesting thing about the reality distortion field that Ron Johnson is clearly vibing is that although everyone realizes that some of the stuff presented is wacky, it may be inspiring to personnel.  I wonder if Johnson will be successful in inspiring his staff to get this turnaround done, unlike say an Eddie Lampert who seems to have an attrition problem.

 

It would be a long answer but let's just say that "we" made the money in private label and financing (and extras like extended warranties). The profitability of stores-within-the-store like MAC, Polo, Natuzzi, 7 for all Mankind, Apple , is just OK after subtracting concessions. We had them for the cool factor and they attracted new customers that you hoped to cross sell.

 

Invert the question, why all these cool kids (and I mean the cool brands) would like to be in a Department Store? Just for the money is not a good answer. There are advantages of being a curator. When the cool brand loses the cool factor it dies, while the department store can move to the next cool thing. But that is not where the money is made.

 

I lived in the US in the mid-90s and the department store was already dead at that time. I think any discussion on the possibility of a revival should start from understanding the economic forces.  Christensen's "Innovators Dilemma" and "Innovator's Solution" are a good place to start.  I also like the historical perspective in Tedlow's "New and Improved" of Sears and A&P (compared to Coke and GM).

[jberkshire01]

Brainstorm Tech Conference interview from this week: http://www.valueinvestingworld.com/2012/07/ron-johnson-interview-from-brainstorm.html

 

[JRH]

I think I have quite a different mental model of the dynamics here, so I appreciate all the other perspectives, quite the stress testing!  To me, the stores are worth a certain price per square foot to essentially act as a landlord to tenants.  They have a cost advantage on malls which means a potential margin advantage (everything else equal) IF they can get people into the stores.

 

Plan, what you said about the department store already being dead in the 90's is clearly important.  It is worth asking what a future retail storefront looks like and where it is located.  Is it possible that the JC Penney real estate is eventually obsolete?  In a race to the bottom, nobody wins.

 

Gonna keep scratching my head on this one for the time being.

[JRH]

Boy, first impression, this did not help me get comfortable:

 

http://fora.tv/2012/07/18/One-on-One_with_Ron_Johnson

[txlaw]

As a shareholder, I put 0% weight into any type of run-off situation or play on real estate.

 

I agree that the situation is similar to Sears (T-10 years) and that's the real reason the Sears investment hasn't worked so far: it has been treated as a slow liquidation and investors have overestimated the value in that scenario.

 

Value of JCP real estate is probably around the current price or higher, but it would take many years (like Sears) and lots of headache along the way. This is why I don't think any current shareholder of JCP should have real-estate-monetization as any part of their thesis. If this scenario starts to play out, I will (gracefully) admit defeat, and move on.

 

Even @ $20 you are no doubt betting on a turnaround. It is essentially investing in a retail startup, with the following differences:

 

Advantage: great (experienced) senior managers; sufficient financing 2+ years out; existing good locations; existing supply/distribution.

Disadvantage: bureaucracy; prior brand association.

 

Can the advantages overcome the disadvantages? Johnson et al could have easily started a truly new retailer from scratch -- they have more than enough money and connections. But they chose to use JCP instead, probably for a good reason. Time will tell if they made a good choice.

 

EDIT: I tackle the pricing hiccup in this post: http://www.futureblind.com/2012/07/jcpenney-a-transformation/ if anyone is interested.

 

When you say you place 0% weight on runoff value, though, do you mean that any purported downside protection from runoff value had no influence on your decision to invest?

 

Another way to ask the question: if runoff value was not close to the market cap, would you be putting your money into this retail start up despite the potential of a permanent loss of capital?

 

I would not put money into a JCP or SHLD or RIMM if I didn't think the downside risk was limited from a permanent impairment of capital perspective.  I also wouldn't buy any of these companies unless I thought the price I was paying would give me a return even in the runoff scenario.

[bathtime]

Boy, first impression, this did not help me get comfortable:

 

http://fora.tv/2012/07/18/One-on-One_with_Ron_Johnson

 

What did you dislike JRH?

 

I had a positive take. He comes across as forward thinking and customer focused to me.

[txlaw]

It would be a long answer but let's just say that "we" made the money in private label and financing. The profitability of stores-within-the-store like MAC, Polo, Natuzzi, 7 for all Mankind, Apple , is just OK after subtracting concessions. We had them for the cool factor and they attracted new customers that you hoped to cross sell.

 

Invert the question, why all these cool kids would like to be in a Department Store? Just for the money is not a good answer. There are advantages of being a curator. When the cool brand loses the cool factor it dies, while the department store can move to the next cool thing. But that is not where the money is made.

 

But isn't that where the real estate story and JCP "cool factor" comes in? 

 

In other words, the way that JCP is supposed to profit substantially from the "stores" within a store concept is by being a low cost provider of hip curated space, thereby capturing more profit than a regular department store otherwise would by hosting the "cool kids" and potentially cross-selling in-house staples (e.g., Martha Stewart).  Additionally, if a true turnaround were to occur and JCP were to acquire caché like a Tarzhay, JCP could potentially extract additional profit by turning nobodies into "cool kids" by letting them hang around with actual "cool kids."

 

This is not to say that this is feasible, but I think that's what Johnson is trying to do.

 

I lived in the US in the mid-90s and the department store was already dead at that time. I think any discussions on its possibility of a revival should start from understanding the economic forces  Christensen's "Innovators Dilemma" and "Innovator's Solution" are a good place to start.  I also like the historical perspective in Tedlow's "New and Improved" of Sears and A&P (compared to Coke and GM).

 

Is it really true that the department store is dead?  I see places like Nordstrom's and Macy's doing pretty well these days.  I'm a fan of Nordstrom's, though I cannot go there often.

[JRH]

There was just a lot in there.  He is very good at communicating a vision filled with exciting ideas.  But as an investor, I need to be able to articulate an investment formula for a company.  I can't tell you whether any or all of the pieces of that vision will work.  Also, I understand the "start-up" language but it really makes it feel like he is trying to say that he has no idea if certain pieces of the strategy will work at all.  Saying they will act like a "start-up" really sounds to me like he knows they're going to be throwing a lot of *^$#@ against the wall and they will have to act fast to capitalize on what sticks.

 

This reminds me of how certain investors profess the strategy of never talking to management because it clouds their judgment.

[PlanMaestro]

 

But isn't that where the real estate story and JCP "cool factor" comes in? 

 

In other words, the way that JCP is supposed to profit substantially from the "stores" within a store concept is by being a low cost provider of hip curated space, thereby capturing more profit than a regular department store otherwise would by hosting the "cool kids" and potentially cross-selling in-house staples (e.g., Martha Stewart).  Additionally, if a true turnaround were to occur and JCP were to acquire caché like a Tarzhay, JCP could potentially extract additional profit by turning nobodies into "cool kids" by letting them hang around with actual "cool kids."

 

This is not to say that this is feasible, but I think that's what Johnson is trying to do.

 

Penney is not cool. And even if it becomes somewhat cool it will be thanks to the kindness of strangers (the coolest brands at the moment). And we know that this kindness costs and can be taken away. To build a brand in retail will never be as easy as for consumer products or even specialty retailers. Let me quote from Retail Power Plays: from trading to brand leadership, Wileman and Jary:

 

Retailers face major problems in building retail brands. Brand-building requires long-term investment, i people and skills, in-store brand product development and quality control, in marketing, in consumer research, and in supplier relationships. The need for, and the costs of, such long-term investment are often at odds with the very tight cost management focus of retailing. Retail profit margins, particularly outside the UK, are thin, often only 1-2% of sales, and may not appear to be capable of supporting brand-building investment.

 

More:

 

It may also be argued that there are structural differences between retail and producer businesses that prevent retail brands from operating at the same level as producer brands. Key differences could include: the difficulty of segmentation, a key element of producer brand strategy, when applied to many retail sectors; the necessity for even market leaders in retail to remain very competitive on price; and the problems of defining a retail brand positioning that is clear and distinctive and yet can still embrace thousands of product lines. This is a very real issue, which we will return to in full later in the book.

 

Those are a problems for all retailers, but even more for a department store in multiple categories and products, where each point of contact or employee can destroy the brand investment. That is one of the reasons why limited assortment has been one of the few areas of success in retail (Trader's Joe, Costco, Apple, Aldi ...)

 

Johnson likes to rub himself on Mickey Drexler's aura and counsel but I don't think he is implementing his main advice: "It's all about the product". The pixie dust is just a complement and very difficult to build even more for a department store.

 

Is it really true that the department store is dead?  I see places like Nordstrom's and Macy's doing pretty well these days.  I'm a fan of Nordstrom's, though I cannot go there often.

 

Any analysis of market share will show that department stores are losing on both ends. The most sophisticated customers prefer specialty stores, and the price driven go to off-mall stores like WalMart, Target, Kohl's. The disruption moved from lower margin hard items like white goods, electronics to higher margins soft items like apparel and cosmetics (Check Christensen's Innovators Dilemma),  The problems is that the Department Stores are not being able to even defend the soft goods categories that are fragmenting in smaller but more specialized and innovative competitors (Zara, H&M, Sephora, MAC) while the department stores are battling in all fronts.

 

OK, I will have to find my old "Future of the Department Store" [or lack of it] presentation to the board. Ah, here it is a

 

Profitability analysis, check the turnover (sales over assets) of WalMart

* Penney 1952 Net Margin 8.5%  Turnover 3.05x ROA 26.2%, Penney 2002 5.4% 1.8x 9.7%

* Sears 1952 10.3% 2.15x 22.1% 2002 10.2% 0.82x 8.4%

* Target 1972 9.9% 1.62x 16% 2002 10.1% 1.54x 15.6%

* WalMart 1972 7.0% 2.70x 18.8% 2002 6.3% 2.59x 16.4%

 

Share of sales

* Department Stores 1982 26% 1992 19%

* General Merchandise/Variety 36% 19%

* Discount Stores 27% 41%

* Specialty Stores 11% 21%

 

In soft goods,

apparel share 1998 2001

* Department Stores 21.9% 19.7%

* Mass Merchants 19.4% 21.8%

* Specialty Stores (Gap, Limited, Aberbrombie, ) 24.4% 24.9%

 

apparel retail profitability EBIT Margin 1998:

* Discount/off-price stores (TJX, Ross,...) 7.9%

* Department Stores 6.4%

* Major Chains (Sears, Penney, Kohl's) 4.2%

* Specialty Stores (Gap, Limited, Aberbrombie, ) 19.4%

* Direct Mail 2.5%

 

If Penney could become a Nordstrom I would call that a success. One of the problems is that Penney is of a different scale and does not have Nordstrom's service culture ... few have since Nordstrom was built in that upscale way from the start.  It is closer to a Saks (very small niche) than the large chains. And also: "Nordstrom generally did not install boutiques or permanent fixtures and floor space for popular brands as many of its competitors did". Nordstrom was always about building their own brand not others.

 

The only department store growing is Kohl's, but is an off-mall retailer (one-storey smaller layout) and it shows that the mall is becoming a space for high end specialty retailers, fast and flexible, than a place for a large and slow department store.

 

[maxprogram]

When you say you place 0% weight on runoff value, though, do you mean that any purported downside protection from runoff value had no influence on your decision to invest?

 

Another way to ask the question: if runoff value was not close to the market cap, would you be putting your money into this retail start up despite the potential of a permanent loss of capital?

 

Yes, that's essentially right. Of course, there is some downside protection, but it has not influenced my thesis at all. I think if this does not turnaround, you will very likely lose money at this point, or at the very least many years of opportunity cost. (Unless Ackman had some trick up his sleeve, but I wouldn't count on that either.)

 

Admittedly if it were a true "startup" with no backing physical assets, I would likely have a smaller position. But I am comfortable with the startup nature of this and I would rather have Ron Johnson admit that he doesn't know how exactly this will play out (the truth) then pretend they know exactly what to do to be successful.

 

This is not a situation to me where you can say: "buy the assets at a bargain, get a potential turnaround for free". You are betting on a turnaround, and will have to wait at least a few years to see if it's working.

[bathtime]

Yes, the interview was long on story and short on details - the company presentation is more useful for the investor rationale. Seemed like he partly withheld strategic details for competitive reasons. I like that he has a long term vision and that he is bringing new ideas to the business model.

 

I personally don't like the new JC Penney logo. The Target logo branding was really effective, so I'm surprised he didn't come up with something more visually strong. It seems kind of awkward, simplistic, and empty to me.

 

http://www.jcpenney.com/dotcom/images/jcp_new_logo.png

 

I know the problem of talking to management and having it cloud my judgement. I'm susceptible to a good sales pitch.

[hyten1]

Plan

 

one comment, I haven't study this space much and my knowledge of JCP is limited but while I was reading your post you mention

 

"The problems is that the Department Stores are not being able to even defend the soft goods categories that are fragmenting in smaller but more specialized and innovative competitors (Zara, H&M, Sephora, MAC) while the department stores are battling in all fronts."

 

Your above comment, doesn't that actually support what JCP is trying to do? JCP is trying to do the store within the store concept? Inside JCP they will have smaller store, possible a MAC or Sephora (which i think they already have).

 

hy

[txlaw]

Penney is not cool. And even if it becomes somewhat cool it will be thanks to the kindness of strangers (the coolest brands at the moment). And we know that this kindness costs and can be taken away. To build a brand in retail will never be as easy as for consumer products or even specialty retailers.

 

Right.  JCP certainly is not cool right now.  The plan is to become cool or at least somewhat cool by providing access to new cool brands that have had some designer input in a store within a store format.  See Ron Johnson's presentation from last year. 

 

Call it the Sephora effect.  JCP's brand went up a notch by being the exclusive place for Sephora within the department store.  Now perhaps that hurt Sephora more than it helped JCP, but that's unclear to me.  So the idea, I think, is to get a bunch of cool kids on board (perhaps by offering them a chance to leverage their brand to sell lower-end designer products and capture most of the profit) to make JCP cool, which will allow JCP to eventually capture a a greater portion of the designer/physical experience profit and better utilize its low cost retail real estate.

 

A lot of steps need to go right though to make this happen.  I don't discount  your skepticism at all, at it seems it could be a very tough feat to pull off.  However, that is, of course, why Ron Johnson accepted the challenge.  If he can pull it off, he will become like a Mickey Drexler in the eyes of the industry skeptics. 

 

I'm just trying to figure out the potential upside if we don't have to go to runoff mode.

 

Any analysis of market share will show that department stores are losing on both ends. The most sophisticated customers prefer specialty stores, and the price driven go to off-mall stores like WalMart, Target, Kohl's.

 

I think this is the point of the store within a store attempt.  Because the department/discount store as we know it, except in the case of, say, a Nordstrom's, is facing real challenges, particularly because of the rise of AMZN et al.

[NormR]

Good posts on JCP, interesting discussion.  Thanks.

[PlanMaestro]

Your above comment, doesn't that actually support what JCP is trying to do? JCP is trying to do the store within the store concept? Inside JCP they will have smaller store, possible a MAC or Sephora (which i think they already have).

 

As every other department store is doing. But you have to understand that they have the worst real estate in the mall since they were supposed to attract customers (they used to be called anchor stores but now that term has passed its usefulness). So they have lost their destination status and they are having to lower themselves and negotiate with cool brands that are most probably also on the same mall to stop the trend (location, location, location) and the cool kids will get their pound of flesh. So that part of the strategy is defensive.

 

http://en.wikipedia.org/wiki/Anchor_store

 

The offensive part is to build a brand and have his price integrity. That part is not just about increasing margins, though that is important, but it also permits the store to attract even cooler kids that are not to be worried of diluting their own brands in a promotional environment.  The thing is when you start to do that you are running a big risk of becoming a museum (cool stuff that nobody sees much less shop), you've become Saks. You are in a corner where you've lost middle America and become a niche player ... certainly much smaller than Penney currently is.

 

Johnson is talking about caring about the customer, but his current customer is voting with their feet. I don't have Penney's segmentation analysis but let me simplify. His new pricing strategy is basically telling his old clientele, that has always shopped at Penney, pays full prices, and pays the overhead: you are not cool enough... you are not part of our future. And he is telling his more price sensitive clientele: I will raise your prices and if you do not like it sorry go somewhere else. So on general terms, they are going for a new clientele ... that is VERY risky.

 

It is not Apple's strategy after Job's return. He cut not only their number of models (limited assortment) but also focused on the clients where they were strong: publishing and education until stabilizing the company. Here Penney is going after a new clientele and they are not even reducing the number of stores and their size (that I have to concede is difficult).

 

I understand what he is trying to do and he has strengths, but it is very risky: new clients, new products, new competences on a very large scale. Also remember, this is not the first Penney turnaround. They had one in the 80s that was very successful (focused on the soft categories mainly apparel) but that did not change the long term trend: price sensitive customers going to off-mall retailers while the mall concentrates in soft goods and innovative categories.

 

And we have not even started talking about the internet.

[hyten1]

plan

 

like i said before I am no expert with jcp or this space

 

but one thing I do want to point out,  from my understanding the focus at jcp is not so much we will raise your price. My understanding is in the past their merchandise are mark up to begin with, they are subsequently mark down for the sales that was their model. This up and down game, sales game they play.

 

now instead of marking it up 50% to begin with and then lower it 50% the price will start out at the discount price.

 

so its like not all of sudden the prices will stay at the 50% mark up price to begin with, also the goal is to have better merchandise.

 

again i am not saying jcp is all good and dandy etc etc. just want to point this out.

 

i don't think they are completely/totally "new clients, new products, etc", I could be wrong. But I do have to agree it make logical sense, but we all know things don't always work logically.

 

just my 2 cents

 

hy

[PlanMaestro]

but one thing I do want to point out,  from my understanding the focus at jcp is not so much we will raise your price. My understanding is in the past their merchandise are mark up to begin with, they are subsequently mark down for the sales that was their model. This up and down game, sales game they play.

 

now instead of marking it up 50% to begin with and then lower it 50% the price will start out at the discount price.

 

so its like not all of sudden the prices will stay at the 50% mark up price to begin with, also the goal is to have better merchandise.

 

again i am not saying jcp is all good and dandy etc etc. just want to point this out.

 

i don't think they are completely/totally "new clients, new products, etc", I could be wrong. But I do have to agree it make logical sense, but we all know things don't always work logically.

 

HY, that is "reality distortion field" like his Middle America comment. He wants to build a brand so he can have higher margins and attract the cool brands.  There are reasons, beyond lazy merchants, for department stores becoming more promotional over time.

[hyten1]

another way i was thinking of JCP (i am sure this is not new)

 

jcp will be partly like a REIT, they own 51% of their stores along with very low lease on the others. with the store within store concept part of the square footage of their store will be taken up by these smaller stores. what will be the percentage? 50% 80%?

 

so its like them renting their store out to other store, like a mall reit. some of the best mall reits are SPG and GGP they trade mostly on yield. (all around 2%)

 

what if JCP becomes completely a mall REIT what would the # be like

 

hy

 

 

[PlanMaestro]

another way i was thinking of JCP (i am sure this is not new)

 

jcp will be partly like a REIT, they own 51% of their stores along with very low lease on the others. with the store within store concept part of the square footage of their store will be taken up by these smaller stores. what will be the percentage? 50% 80%?

 

so its like them renting their store out to other store, like a mall reit. some of the best mall reits are SPG and GGP they trade mostly on yield. (all around 2%)

 

what if JCP becomes completely a mall REIT what would the # be like

 

hy

 

If JCP gets to that stage it would be a success, the thing is how to get there from here.

 

It is not like these cool brands run to these stores-within-a-store and give you their whole product line or the best product while, at the same time, JCP is trying to sell its own product, has its brand in the front entrance, and it is located in that part of the mall where you have to really walk to get there. These brands live by their brand and they will protect it.

[AAOI]

Your above comment, doesn't that actually support what JCP is trying to do? JCP is trying to do the store within the store concept? Inside JCP they will have smaller store, possible a MAC or Sephora (which i think they already have).

 

As every other department store is doing. But you have to understand that they have the worst real estate in the mall since they were supposed to attract customers (they used to be call anchor stores but now that term has passed its usefulness). So they have lost their destination status and they are having to lower themselves and negotiate with cool brands that are most probably also on the same mall to stop the trend (location, location, location) and the cool kids will get their pound of flesh. So that part of the strategy is defensive.

 

http://en.wikipedia.org/wiki/Anchor_store

 

The offensive part is to build a brand and have his price integrity. That part is not just about increasing margins, though that is important, but it also permits the store to attract even cooler kids that are not to be worried of diluting their own brands in a promotional environment.  The thing is when you start to do that you are running a big risk of becoming a museum (cool stuff that nobody sees much less shop), you've become Saks. You are in a corner where you've lost middle America and become a niche player ... certainly much smaller than Penney currently is.

 

Johnson is talking about caring about the customer, but his current customer is voting with their feet. I don't have Penney's segmentation analysis but let me simplify. His new pricing strategy is basically telling his old clientele, that has always shopped at Penney, pays full prices, and pays the overhead: you are not cool enough... you are not part of our future. And he is telling his more price sensitive clientele: I will raise your prices and if you do not like it sorry go somewhere else. So on general terms, they are going for a new clientele ... that is VERY risky.

 

It is not Apple's strategy after Job's return. He cut not only their number of models (limited assortment) but also focused on the clients where they were strong: publishing and education until stabilizing the company. Here Penney is going after a new clientele and they are not even reducing the number of stores and their size (that I have to concede is difficult).

 

I understand what he is trying to do and he has strengths, but it is very risky: new clients, new products, new competences on a very large scale. Also remember, this is not the first Penney turnaround. They had one in the 80s that was very successful (focused on the soft categories mainly apparel) but that did not change the long term trend: price sensitive customers going to off-mall retailers while the mall concentrates in soft goods and innovative categories.

 

And we have not even start talking about the internet.

 

Plan, been meaning to shoot you an email to pick your brain on this for awhile now so I'm glad to see this thread. Anyhow, below is a comment of mine from a month or so back discussing my thoughts on the customer issue and all of the media hoopla over the change in pricing (and its effect on sales)... 

 

"At the end of the day I think this idea really lives or dies on whether they can bring in higher quality vendors that attract a much higher quality and younger demographic...so the only way to do that is to bring in vendors who offer merchandise that people want and are actually willing to buy irrespective of whether its on sale or not. I think the only way that happens is if its crystal clear to top tier vendors that the days of perpetual markdowns are gone forever. If they doubt that commitment the odds they are willing to wade into the JCP fold are close to nil in my mind so my hunch is that's the real reason Johnson decided to go "cold turkey" on coupons and not because he was naive about any of the behavioral issues of coupon clippers and the recent strategies effect on sales.

 

Also, and maybe I'm missing something here (so any and all pushback would be appreciated) but isn't all the worry about the pricing changes/where normalized sales per square foot balance out as it relates to the historical customer base somewhat off base? For example, if one of the new JCP vendors is a specialty retailer with no real on mall presence like say Urban Outfitters, then a portion of the "new" JCP's sales and traffic in say 2015 will naturally be driven by existing customers of URBN and not JCP. What I mean is won't JCP's future sales levels (for better or worse) by and large be a function of the new vendors and not as much about legacy JCP customers and their preferences (read addiction to coupons).

 

So the critical point is that JCP's sales and operating profitability in say 2015 will be driven by the existing customers of future vendors as much (if not more) than any other factor and hence looking to the rearview and/or present customer composition to divine future sales trends seems like a mistake. Just thinking out loud here so would love anyone's thoughts..."

 

Any thoughts on that point of view? I hear you on the riskiness of attempting to change your customer composition but I'm not sure that's whats actually going on here per se (as outlined above). Also, this transcript on his interview from the other day is a pretty solid read, love to get your thoughts on any of the new details...

 

http://tech.fortune.cnn.com/2012/07/18/transcript-ron-johnson/

 

Personally I think it probably works but the real risk to success (or one of the issues that I worry about most) is not Johnson's alienation of the coupon clipping crowd, as clearly they have to go if this things going to succeed/get off the ground from a "bring in the cool kids" standpoint, but from alienating BOTH the clippers in addition to their more traditional customer base at the same time to such an extent that the impact to sales is catastrophic. I mean what he is attempting is difficult enough as is, so why he feels like playing with fire by leading a some ridiculous progressive campaign that likely offends more than half of his customer base is just nuts, and as things stand today it won't take much to make that happen given its not like anyones giving up much by going elsewhere. So its that type of one two punch that keeps me up at night on this one (hopefully someone has whispered in his ear by now and told him to knock that shit off, at least until the transformation is further along and the sales drop has reversed itself (he can always go about his moral preening if he "must" farther down the road, just seems flat crazy to do it now though in context of the current predicament).

 

Regardless, I think they should generate enough cash to bridge the transition relatively easily if sales stabilize around the current levels. Who knows though, but I do like his basic plan and think this could be a wild success if they can just get over the hump between now and the time the transition is complete circa 2015. Of course, at this price even modest improvements in margins and profitability should result in substantial upside and if Johnson can execute on anything close to say what Ackman expects look out. 

[Buddy0807]

Assuming JCP's vision plays out as planned, has anyone given thought to how the broader mall operators will respond, if at all, especially if it results in lower mall rents for the coveted specialty stores?  The way I think about it, JCP's store within a store concept is essentially "stealing" high rent specialty stores from the mall operators...

[bathtime]

Facebook comments (on any post) have tons of opinions on the changes:

 

https://www.facebook.com/jcp