JCP - JC Penney

[AAOI]

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...

 

I wouldn't characterize the arbitrage as "stealing" because if it works, and by works I mean ultimately attracting substantially more shoppers to the mall, why would the mall operators object? Maybe I'm missing something, but isn't the whole point of giving low cost leases to "anchor" tenants to attract shoppers to the mall? Presumably the mall operators provide low cost leases to anchor tenants because they look at it as an investment, basically an asset that's primary purpose is to drive customer traffic. If I'm not wrong about that, seems logical that they would actually welcome it given their asset would be running at a much higher utilization (i.e. driving substantially more foot traffic).

 

Just thinking out loud here but seems like more foot traffic at JCP means more foot traffic at the mall, and the more foot traffic at the mall, the more valuable the rest of the malls RE becomes - which is what mall operators want and really the entire reason why they're willing to give company's capable of driving large amounts of traffic long term below market rents. I realize that's an oversimplification, but thats why I can't really see any real objection to it by the GGP's of the world. As an aside, seems Ackman & Roth would know about as well as anybody what would piss the operators off, and presumably they don't see it as an issue. Again, maybe I'm missing something here but it the more I've thought about it the more I think its a rather brilliant arbitrage.

[link01]

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...

 

I wouldn't characterize the arbitrage as "stealing" because if it works, and by works I mean ultimately attracting substantially more shoppers to the mall, why would the mall operators object? Maybe I'm missing something, but isn't the whole point of giving low cost leases to "anchor" tenants to attract shoppers to the mall? Presumably the mall operators provide low cost leases to anchor tenants because they look at it as an investment, basically an asset that's primary purpose is to drive customer traffic. If I'm not wrong about that, seems logical that they would actually welcome it given their asset would be running at a much higher utilization (i.e. driving substantially more foot traffic).

 

Just thinking out loud here but seems like more foot traffic at JCP means more foot traffic at the mall, and the more foot traffic at the mall, the more valuable the rest of the malls RE becomes - which is what mall operators want and really the entire reason why they're willing to give company's capable of driving large amounts of traffic long term below market rents. I realize that's an oversimplification, but thats why I can't really see any real objection to it by the GGP's of the world. As an aside, seems Ackman & Roth would know about as well as anybody what would piss the operators off, and presumably they don't see it as an issue. Again, maybe I'm missing something here but it the more I've thought about it the more I think its a rather brilliant arbitrage.

 

i give ackman & johnson kudo's for their creative retailing vision but their all-in all at once strategy strikes me as a drunken gamble. why not start more slowly until you prove that you can find your feet & gain traction, starting with the your under performing stores? the way they are doing it now needlessly risks burning their bridges to the point of no return.

[PlanMaestro]

Just thinking out loud here but seems like more foot traffic at JCP means more foot traffic at the mall, and the more foot traffic at the mall, the more valuable the rest of the malls RE becomes - which is what mall operators want and really the entire reason why they're willing to give company's capable of driving large amounts of traffic long term below market rents.

 

AAOI, it looks like we are on the same page on this point and all the other ones. I also wondered as link01 seems to imply, why they are running the program in such a committal way. They could have tested customer's reaction in stores within a certain region first.

[hyten1]

well one of the biggest problem with doing it with few store at a time is you will potentially not get the good stores

 

the whole idea is what jcp is completely changing its image, way of doing things etc. I am sure many brand/store will be reluctant to have a store within  JCP if JCP is still acting in its old way, being promotional etc etc.

 

in order to attract good stores/brand JCP need to change and do a complete overhall. i guess the counter argument is maybe they can get good brand/store without complete overhall of the image/store i.e. sephora.

 

but i understand what you guys are saying.

[PlanMaestro]

well one of the biggest problem with doing it with few store at a time is you will potentially not get the good stores

 

the whole idea is what jcp is completely changing its image, way of doing things etc. I am sure many brand/store will be reluctant to have a store within  JCP if JCP is still acting in its old way, being promotional etc etc.

 

in order to attract good stores/brand JCP need to change and do a complete overhall. i guess the counter argument is maybe they can get good brand/store without complete overhall of the image/store i.e. sephora.

 

but i understand what you guys are saying.

 

Right, that must be the reason. Though, I would not like to run a turnaround with so many risks w/o a backup plan.

[txlaw]

The last couple of posts demonstrate why the runoff scenario is so key, at least to anyone who is considering this a "value investment" as opposed to a venture capital-type investment.

 

Ron Johnson's transformation approach is an all-in decision.  If you're Bill Ackman, I don't see how you go to your investors and tell them that this is a good idea unless you can say that there is an MOS represented by the real estate if the plan doesn't work.

[hyten1]

txlaw

 

agree, what is jcp had to close shop, if they spin off their real estate as a REIT how much would that be worth?

 

hy

[Guest valueInv]

Interview with Ron Johnson adding some color to the situation:

 

http://www.gurufocus.com/news/183374/jc-penneys-ron-johnson-at-brainstorm-tech--notes

[mcliu]

How does the store within a store actually work? Is it merely reshuffling of merchandise and building little display stores, or is JCP renting space out to other brands?

[PlanMaestro]

How does the store within a store actually work? Is it merely reshuffling of merchandise and building little display stores, or is JCP renting space out to other brands?

 

http://adage.com/article/news/jc-penney-launches-shops-concept-levi-s-store/236252/

 

 

The women's Levi shop is retooled with Curve ID, which allows customers to select their perfect pair of jeans based on body shape, not size.

 

JC Penney's new stores will include three formats: boutiques, which are under 750 square feet; shops, which are between 750 and 1,400 square feet; and stores; which will be over 1,400 square feet.

 

The shop for Arizona, JC Penney's proprietary brand, was inspired by the idea of a group of teenagers getting their hands on a Volkswagen bus and taking a trip across the country, stopping in Arizona, Mr. Fay said. Aside from new signage and decor, Mr. Fay said they also worked on the quality and fit of the merchandise.

 

Jeans by Buffalo, an exclusive line for JC Penney, is housed in the smaller boutique format, with the collection changing every month.

 

The boutiques and shops will remain open (not blocked off with doors), allowing customers to engage with the entire store and easily navigate into other shops, Mr. Fay said.

 

By Sept. 1, JC Penney will also open an Izod shop, a Liz Claiborne store and a shop for its own JCP men's and women's brand. It's also slowly revamping other parts of the its stores that have not received a makeover, editing out assortments and focusing on brands that have shown promise, turning merchandise out to face the customer and adding mannequins to show shoppers how to complete an outfit.

 

Going forward, JC Penney is also considering grouping merchandise into shops not only based on brand but also by lifestyle, such as action sports.

 

JC Penney said it is rolling out extensive marketing for the shops, including direct mailings, pre-print and TV spots. It's also offering a promotion for free haircuts for children in August to get shoppers into the store for back-to-school shopping and to check out the new shops.

 

The first iteration of the shops comes as the department store hits a speed bump with its partnership with Martha Stewart and struggles with criticism for its pricing strategy.

 

[PlanMaestro]

The Dying Discount Department Store

Mid- and down-market department stores are hurting due to E-commerce and big-box competition

http://www.usnews.com/news/articles/2012/07/23/the-dying-discount-department-store

 

Is it time to eulogize the department store? The most recent retail sales data from the Commerce Department show a retail species in trouble. In June, department store sales were down by 3.2 percent from one year ago. In the second quarter they were also down 2.4 percent from one year prior. Altogether, department stores' sales have declined considerably since 2001, when they approached $20 billion per month. Now, they are at around $15.1 billion.

 

But that's not the whole story. According to figures from the National Retail Federation, upscale department store Nordstrom saw impressive sales figures last year, with growth of 12.7 percent and store growth of 10.3 percent, and sales at high-end Neiman Marcus grew by 8.4 percent, while Macy's saw more modest growth, at 5.7 percent. Meanwhile, sales plummeted at JCPenney (-2.9 percent) and Sears (-4.3 percent).

 

In a field of flagging department stores, luxury is still living large. The stores further down-market, however, could potentially fade from view.

 

"Middle-market department stores like Macy's or Kohl's haven't been performing well as compared to Saks or Nordstrom," says Eben Jose, industry research analyst at business research firm IBISWorld.

[mcliu]

Thanks for the link, PlanMaestro. I wonder what the plan is when there's already a Levi's store within the mall that JCPenny is in and how the economics compares for a store-within-a-store vs. opening up an individual store in the mall.

[PlanMaestro]

Penney Tweaks Price Strategy Yet Again

http://online.wsj.com/article/SB10000872396390444840104577549371566806142.html

 

 

Under the new policy, which kicks off in August, Penney will get rid of monthlong specials that cut prices of select items by 20% to 29% and instead will permanently mark down a large amount of merchandise in stores by similar amounts, the people said.

 

The move is an acknowledgment that the department store chain needs deeper price cuts to stem a dive in sales caused by the company ending its ceaseless sales and coupons. The strategy caused revenue in the company's fiscal first quarter to fall by one fifth. Penney executives expect second-quarter figures to be equally grim, according to people familiar with the matter.

 

It is also an attempt to clarify for consumers what Penney executives acknowledge has been a confusing pricing strategy. After the change, Penney will offer just two options: everyday low prices and clearance sales on certain items.

 

 

 

[PlanMaestro]

Cosabella Amore and Cosmopolitan are among the newest group of brands that will open shops within J.C. Penney stores, with exclusive lines designed just for the department store chain. Lingerie brands Maidenform and Vanity Fair will get a revamped presence in the stores, and brands including Carter, Giggle, Cynthia Rowley and Tori Spelling will lend their names and styles to the children's department.

[valuecfa]

If the turnaround is successful, i think it will take some time to switch the customer base from its current demographic to future demographic (in which i believe they are somewhat different). There is likely to be a period of disappointment, that i think will extend well beyond the recent quarter during this adjustment.

 

The lack of new customer demographic (that has the old outdated JCP reference in mind, and thinks JCP just isn't 'cool') will take time to gravitate to the concept. Many younger people wouldn't be caught dead shopping in a JCP (they almost equate it to shopping for clothes at Walmart). Unlike us that follow the stock somewhat, the average Joe or Jill learns about the change only when they see it, or by word of mouth, not from CNBC.

 

Meanwhile, the "old" demographic might not appeal to the concept quite as much, especially without the gratification of coupon discounting. I think the friction there will cause disappointment over the near term, and success over the long term. Time will tell, but there will likely be a better opportunity to enter the stock in my opinion, if earnings/sales continue to disappoint over the near term....which i think they will.

 

I think there may be a disappointment over the next year as the new concept is accepted...but the outcome being much better over the long term than the older concept.

[Cardboard]

I agree with you Valuecfa. I could only interpret the stock reaction today as massive panic short covering. Earnings will be absent for quite a while despite the $900 million in cost savings.

 

I saw after my original post that the dividend had been cut to nothing. So you are no longer being paid to wait and regarding value, it is now well above book and after trying to assess the value of the owned real estate vs REIT's, I could only conclude that it supports current book value.

 

Right now, I feel that people are paying a big premium for the turnaround based on Johnson and Ackman. If there is an air pocket with the U.S. economy, I believe that this premium will fade very quickly. However, the upside potential if this thing works looks very appealing.

 

Cardboard

[keerthiprasad]

Thanks for the link, PlanMaestro. I wonder what the plan is when there's already a Levi's store within the mall that JCPenny is in and how the economics compares for a store-within-a-store vs. opening up an individual store in the mall.

 

I believe the specialized levi's stores carry a slightly more upscale product line and tend to cater to denim lovers.

[ClientNine]

I appreciate the great discussion of JCP on this message board. I don't post often but I've been looking carefully at JCP and wanted to share some of my thoughts.

 

In the last two months, I have conducted store visits to 12 JC Penney stores in the Southern California area. The locations range from Class A+ malls, to Class C malls, to outdoor lifestyle centers. The first batch of visits were conducted in early July when the first shops were under construction. The second batch have been conducted in the last several weeks to see the result of the first batch of shops.

 

Shops:

 

Buffalo Jeans: It's hard to tell that this boutique sized shop has received much capex. They don't seem to have the integrated displays, signage, lighting, flooring, and identity of the Arizona or Levi's stores. In all my store visits I did not see anyone buying here. The merchandise was OK, but it's hard for me to tell why I would buy any of it over other brands in the store.

 

Arizona: whether you're looking in the men's or women's side of the store, the Arizona shops have very little traffic right now. The merchandise quality is fairly high, with good jeans at a $25 price point and and an assortment of shirts and other merchandise at good price points. The presentation emphasizes southwestern themes, with Navajo rugs on the poured concrete floor, large graphics and photos of the Arizona dessert, and attractive tables and displays. However, for reasons that include the clearance fire sale elsewhere in the store (detailed later in this post), there seems to be very little sales conversion going on in this boutique. Given the quality of the merchandise and display, I do think this brand's performance should improve over time. I'll be visiting stores again in September and will focus a lot on Arizona.

 

Levi's: Clearly a winner. In my July store visits, the difference between the way that JC Penney presented Levi's, and the way that their competitors like Kohl's or Macy's did, was stark. Penney used to pile jeans in a sorry corner with poor lighting and sagging shelves. I never saw anyone buy a pair.

 

Now, the advantage has swung to Penney. The Levi's denim bars are attractive, well lit, designed with light wood tables and fixtures and lots of metal for an industrial look, and stocked with a big variety of merchandise. Price points are $40 - $55 depending on the style of jean, with good pricing on other merchandise. Activity was strong and in each store visit, I saw men and women trying on and buying multiple pairs of Levi's. Entire families were outfitting their kids, and lots of women were critiquing husbands/boyfriends as they tried on jeans. Inventory is piled high in attractive racks at the back of the display, emphasizing the depth of the selection available. Other than dedicated Levi's stores, JC Penney is now the best store in a mall to buy Levi's. If the other brand rollouts look like this, there is a lot to be optimistic about.

 

Legacy shops: Sephora is clearly a massive success. Regardless of store or time of day, I almost always saw half a dozen women shopping for makeup, getting attention from staff, or waiting in line to make a purchase. Also, the Sephora store's demographics are clearly younger and seem more affluent than the rest of the store. So young women (high propensity shoppers) are clearly willing to come into JCP for the right product. Also, Sephora traffic seemed unaffected by whether there was a Sephora boutique elsewhere in the mall or not, which I found surprising.

 

MNG by Mango had much less traffic, but merchandise quality and sales activity were clearly higher than other product nearby. This shows clearly that the appeal & uniqueness of product in specialty shops will be key. With Sephora and MNG both well rolled out through the chain and known by the customer base, people are flocking to Sephora but driving traffic to MNG by Mango that is only incrementally higher than similar product.

 

Clearance:

 

Management has said that they have two big buckets of clearance items that they're working to move: the two-year-old inventory clogging warehouses that was talked about in the Q1 call, and the discontinued merchandise talked about in the Q2 call that they're moving to get rid of to free up space for the coming shops. You can clearly see this in the stores: something like 15% to 20% of active (not under construction) floor space is given over to clearance items. Tee shirts at under $10, separates under $10, jeans at $15, women's dresses at all sorts of price points that are very low. Almost all of this merchandise is house brands or low quality, almost unbranded. There's a real treasure hunt going on and these parts of the store consistently had the most traffic when compared to the newer, better merchandise. This highlights the old customer/new customer risk that a lot of people have been talking about.

 

That said, when this merchandise is gone, there's a lot of floor space dedicated to low quality, barely profitable merchandise that will be freed up.

 

Home: The home section is a ghost town. Kohl's and Macy's at the same malls seem to have much better traffic in this section. I have to imagine that even given the higher ASPs in home, that sales per SF have to be impossibly low. Depending on your perspective, this is either an opportunity or a problem.

 

Remodelings: In both July (for Levi's Arizona, and Buffalo) and August (for Liz Claiborne, Izod and JCP house brand) I estimate that 5% to 7% of selling space has been taken offline for the shop buildout. In July, there were prominent "shops coming" signs on the plastic tarps that walled off the area, but in August the signage is nowhere to be found. The August buildouts tend to be focused around the front and center of the stores, while the July buildouts were in more perimeter areas.

 

Brands: Brand quality is clearly improving week by week. Six to eight weeks ago, merchandise was almost entirely private label. Now, you can find Lee, Haggar, Dockers, Van Heusen, Nike, Vans, Stacy Adams, Skechers, DC, Addidas, Izod, and other quality brands with some prominence.

 

Overall traffic: JC Penney stores in Southern California seem to drag their malls to the center. At most Class A malls, traffic is lower than center-of-mall shops and other anchors, with a few exceptions that seem to be determined mostly by the location of the parking lot (i.e. huge traffic at Class A Glendale Galleria because JC Penney is close to the biggest parking area). At the lower quality malls in lower income neighborhoods, JC Penney appeared to be doing better than the other stores in the mall.

 

Also, in the Class C malls, you can see massive traffic surges around bi-weekly payroll days, with sales and traffic tapering off at other times.

 

Other, general impressions: Staff is clearly getting better trained. The more recent my store visit, the more likely I was to be greeted by staff and asked if I needed help. Eight weeks ago there was none of that.

 

Traffic and purchase activity seems to be up in August versus July, though it's hard to tell how much of that is because of back to school and/or free hair cuts.

 

Best,

ClientNine

 

[Guest valueInv]

Great post, ClientNine.

[Green King]

Great post, ClientNine.

 

+1

[CONeal]

ClientNine,

 

While you was scoping out Penny's did you happen to notice if people that were there for the free haircut if you also saw them making purchases in the store?  Wondering if people are taking advantage of the haircut and then leaving to shop elsewhere.

[PlanMaestro]

The following Businer Insider takedown is too harsh (hey there is a plan in there!) but people starting to catch up to the distorted reality. Bill Dreher of Newedge USA told Johnson on the call: "I want to applaud you for creating one of the most exciting stories in retail write-down."

 

The 10 Weirdest Things JC Penney CEO Ron Johnson Told Wall Street Last Week

http://finance.yahoo.com/news/10-weirdest-things-jc-penney-144100514.html

 

Now, the good part is that Johnson disclosed his endgame: Selfridges. Another retailer admiring its British counterpart. This one has some tough competition (Tesco, Marks & Spencer, and all the innovative European specialty retailers starting with Zara and H&M). Well, some of them are not really competition, you will see why in a minute. But still, it is a very good retailer.

 

But let me ask the question: How many stores do you think Selfridges has? For the answer, go here.

 

http://www.selfridges.com/en/StaticPage/Store%20Locations/

 

And this from Wikipedia, was the value of it when taken private:

 

In 2003, the chain was acquired by Canada's Galen Weston for £598 million. Weston, a retailing expert who is the owner of department store chains such as Holt Renfrew and Brown Thomas as well as major supermarket chains in Canada, has chosen to invest in renovation of the Oxford Street store, rather than to carry out planned expansion to Leeds, Newcastle Upon Tyne, Bristol, and Glasgow, despite Selfridges owning a site in the latter city.

 

Man, I love the architecture. Beautiful museums. And that is the problem, if Johnson's plan is to become the next Saks or Harrods he is in for big trouble. If he is only getting inspired and wants to get something in between that has some appeal to middle America while providing time for a downsize roadmap (something that Sears has not managed to do) maybe he is onto something. Something a couple of notches below Nordstrom.

 

The Corte Ingles in Spain and Falabella in Latin America are couple of stores that are trying to get that mix right. I would love to say Marks & Spencer but they are getting killed (and not enough value in that real estate to be a cigar butt). That might give him ideas on how to play that middle of the road. But it is uphill.

[ClientNine]

ClientNine,

 

While you was scoping out Penny's did you happen to notice if people that were there for the free haircut if you also saw them making purchases in the store?  Wondering if people are taking advantage of the haircut and then leaving to shop elsewhere.

 

I did most of my visits before I had noticed the free hair cut promotion, so I wasn't paying attention to the hair salon in the stores.

[PlanMaestro]

Great post ClientNine! At least myself, I am grateful. Made a few questions and comments in-between, would love your point of view if it is not much inconvenience, and feel free to pick and choose, lots of questions in there.

 

In the last two months, I have conducted store visits to 12 JC Penney stores in the Southern California area. The locations range from Class A+ malls, to Class C malls, to outdoor lifestyle centers. The first batch of visits were conducted in early July when the first shops were under construction. The second batch have been conducted in the last several weeks to see the result of the first batch of shops.

 

Were they chosen because they were under construction, or are all Penney's in that area under construction? One thing to get a view is the speed and scale of the changes, and wondering if there is some focus on the efforts or if it is all at the same time.

 

Buffalo Jeans: It's hard to tell that this boutique sized shop has received much capex. They don't seem to have the integrated displays, signage, lighting, flooring, and identity of the Arizona or Levi's stores. In all my store visits I did not see anyone buying here. The merchandise was OK, but it's hard for me to tell why I would buy any of it over other brands in the store.

Don't know Buffalo Jeans, how is its price point in this particular store?

 

From what I see in their site, they are fashion wannabe ($40-$120) the sort of brands you don't want. They don't bring much to the table, seem unfocused and w/o style (jeans in several colors looked like something from The Gap but expensive) and actually target an aspirational buyer that Penney's own brands should try to pick up over time

 

Arizona: whether you're looking in the men's or women's side of the store, the Arizona shops have very little traffic right now. The merchandise quality is fairly high, with good jeans at a $25 price point and and an assortment of shirts and other merchandise at good price points. The presentation emphasizes southwestern themes, with Navajo rugs on the poured concrete floor, large graphics and photos of the Arizona dessert, and attractive tables and displays. However, for reasons that include the clearance fire sale elsewhere in the store (detailed later in this post), there seems to be very little sales conversion going on in this boutique. Given the quality of the merchandise and display, I do think this brand's performance should improve over time. I'll be visiting stores again in September and will focus a lot on Arizona.

 

That is the private label and that is where the margins are. You are completely right to focus on that line. Are they located next to Levi's, pushed in front or to the back? How it is presented, do they have a wall rack or just piled over tabletops? Hanged vs folded? Is this quality product new?

 

Levi's: Clearly a winner. In my July store visits, the difference between the way that JC Penney presented Levi's, and the way that their competitors like Kohl's or Macy's did, was stark. Penney used to pile jeans in a sorry corner with poor lighting and sagging shelves. I never saw anyone buy a pair.

 

Now, the advantage has swung to Penney. The Levi's denim bars are attractive, well lit, designed with light wood tables and fixtures and lots of metal for an industrial look, and stocked with a big variety of merchandise. Price points are $40 - $55 depending on the style of jean, with good pricing on other merchandise. Activity was strong and in each store visit, I saw men and women trying on and buying multiple pairs of Levi's. Entire families were outfitting their kids, and lots of women were critiquing husbands/boyfriends as they tried on jeans. Inventory is piled high in attractive racks at the back of the display, emphasizing the depth of the selection available. Other than dedicated Levi's stores, JC Penney is now the best store in a mall to buy Levi's. If the other brand rollouts look like this, there is a lot to be optimistic about.

 

That is very good news. How does the demographics look? Do they have a full product line? Jeans seems like a category easy to change,that does not alienate everyone, targeting the right new client demographic, and that can be easily changed.

 

Side comments, I thought that Penney was going to introduce a more standardized light wood look in all these new stores-within-a-store. Are the fixtures Levi's own? Where are they located within the store.

 

I imagine that the goal in this department is over time is to get one of these fashion jeans brands. Something like 7 for all Mankind or True Religion, GAP and and Levi's completely missed the fashion jeans trend and it does not look like they will. I have stories of The Gap four years ago, too much operational and cost reduction, and slow time to market.

 

Legacy shops: Sephora is clearly a massive success. Regardless of store or time of day, I almost always saw half a dozen women shopping for makeup, getting attention from staff, or waiting in line to make a purchase. Also, the Sephora store's demographics are clearly younger and seem more affluent than the rest of the store. So young women (high propensity shoppers) are clearly willing to come into JCP for the right product. Also, Sephora traffic seemed unaffected by whether there was a Sephora boutique elsewhere in the mall or not, which I found surprising.

 

Great store, great products, in a key category. Not sure about the speed of their expansion in the US, are there other Sephora stores in those malls? Is MAC or Bobbi Brown anywhere in sight?

 

MNG by Mango had much less traffic, but merchandise quality and sales activity were clearly higher than other product nearby. This shows clearly that the appeal & uniqueness of product in specialty shops will be key. With Sephora and MNG both well rolled out through the chain and known by the customer base, people are flocking to Sephora but driving traffic to MNG by Mango that is only incrementally higher than similar product.

 

Mango is my wife's favorite shop. They are a little more upscale than Zara  and not as aggressive fast fashion. That makes the look more European and I do not think the normal Penney buyer is much into it. It could grow if the demographics start to change. Might be an early indicator.

 

Management has said that they have two big buckets of clearance items that they're working to move: the two-year-old inventory clogging warehouses that was talked about in the Q1 call, and the discontinued merchandise talked about in the Q2 call that they're moving to get rid of to free up space for the coming shops. You can clearly see this in the stores: something like 15% to 20% of active (not under construction) floor space is given over to clearance items. Tee shirts at under $10, separates under $10, jeans at $15, women's dresses at all sorts of price points that are very low. Almost all of this merchandise is house brands or low quality, almost unbranded. There's a real treasure hunt going on and these parts of the store consistently had the most traffic when compared to the newer, better merchandise. This highlights the old customer/new customer risk that a lot of people have been talking about.

 

That said, when this merchandise is gone, there's a lot of floor space dedicated to low quality, barely profitable merchandise that will be freed up.

 

How they are managing inventory within the store is an important part of the process. There are usually this hidden doors in department stores where inventory gets piled and product gets lost. That results in "quiebres" (don't know the translation, means a product is not displayed), lower sales, slower replenishment, and slower adaptation to new trends. To see if they are gaining space for sales area is a good indication of good inventory management. Considering that Johnson wants a clean look ("these aisles are 14 feet wide. These are wider than Nordstrom’s"), I wonder how he expects to do that ... bigger hidden inventory areas in the back?

 

 

Home: The home section is a ghost town. Kohl's and Macy's at the same malls seem to have much better traffic in this section. I have to imagine that even given the higher ASPs in home, that sales per SF have to be impossibly low. Depending on your perspective, this is either an opportunity or a problem.

 

It is a tough department to fix. It is driven by household formation that is in the toilet, and in terms of differentiation with the competition, at least in Latin America, is driven by the wedding present programs to drive loyalty and sales. Stores-within-the-store doesn't seem to be the to move forward ... maybe Polo or similar brands for bed and bath. Not sure how Martha Stewart plays on all this. But it is a category that is a sitting duck for disruption by specialty retailers in fashionable fast moving goods like home decor and kitchen items, and off-mall retailers in slow turnaround items (ie: Ikea or even Costco).

 

It is usually located in the third floor, not good real estate to drive stores-within-the-stores. I've seen stores trying to give it a new life with a gourmet restaurant or other attraction to get destinations status (yoga, haircut). But I think that its performance will depend a lot on how they fix women apparel and cosmetics, and they could coattail that success.

 

BTW, how are those two going, women apparel beyond jeans and cosmetics beyond Sephora?

 

Remodelings: In both July (for Levi's Arizona, and Buffalo) and August (for Liz Claiborne, Izod and JCP house brand) I estimate that 5% to 7% of selling space has been taken offline for the shop buildout. In July, there were prominent "shops coming" signs on the plastic tarps that walled off the area, but in August the signage is nowhere to be found. The August buildouts tend to be focused around the front and center of the stores, while the July buildouts were in more perimeter areas.

 

Liz Claiborne is for me one of those mysterious brands. It would never work in Latin America and I am not sure it works in the US either. "Only at JCP" means that they bought the brand or they have an exclusive agreement? No aspirational or fashion appeal, it is bland. Probably what old time buyers like to see but not the new demographics.

 

I would really like to see what they are planning to do here because it doesn't look like they are doing much! It is such a critical department and the stores-within-store strategy seems perfect to fix this, but it does not seem they are attracting the right brands.

 

They are introducing jcp as a new private brand for high-quality fashion basics, and that is great! Great move. I imagine they are concentrating their efforts on one brand to reach some marketing scale, but it is risky. I would like to see that introduction and specifically those products and price points. That also could be an early indicator, basics are bought by everyone and can become an anchor for both demographics.

Also they should also revamp their merchants efforts, for more aspirational and fashionable private-label and bring them some edge (in a Zara, H&M sort of way). Also in handbags, accessories and nightware should be categories where they should be competing but my impression is that they are getting beaten my Coach, Michael Kors,  Victoria Secret. For example, a great brand that I have not seen in the US is Intimissimi.

 

My impression is that it is in this department is where the battle must be won. A delicate balance of adding demographics w/o losing the old customer.

 

http://smallbiztrends.com/2011/10/new-baby-boom-generation-millennials.html

 

Brands: Brand quality is clearly improving week by week. Six to eight weeks ago, merchandise was almost entirely private label. Now, you can find Lee, Haggar, Dockers, Van Heusen, Nike, Vans, Stacy Adams, Skechers, DC, Addidas, Izod, and other quality brands with some prominence.

 

Women apparel .... that is the important one.

 

Overall traffic: JC Penney stores in Southern California seem to drag their malls to the center. At most Class A malls, traffic is lower than center-of-mall shops and other anchors, with a few exceptions that seem to be determined mostly by the location of the parking lot (i.e. huge traffic at Class A Glendale Galleria because JC Penney is close to the biggest parking area). At the lower quality malls in lower income neighborhoods, JC Penney appeared to be doing better than the other stores in the mall.

 

Also, in the Class C malls, you can see massive traffic surges around bi-weekly payroll days, with sales and traffic tapering off at other times.

 

That is a problem for the department stores everywhere. Lots of real estate (2-3 stories) in locations that were destinations not pass through.

 

mmmm... Do you see Client Nine the performance in those C malls suffering with the change to a less promotional strategy? I wonder if the are going to far with the changes in these malls that probably drive the volume not necessarily the margins. But at least JC penney seems to still has some appeal to middle America.

 

Other, general impressions: Staff is clearly getting better trained. The more recent my store visit, the more likely I was to be greeted by staff and asked if I needed help. Eight weeks ago there was none of that.

 

Traffic and purchase activity seems to be up in August versus July, though it's hard to tell how much of that is because of back to school and/or free hair cuts.

 

Training is tough to do, my understanding is that in the US a lot are part-timers and decades of underperformance plus higher wages led to understaffing and bad service. One thing to follow is if Johnson's cuts are at the corporate level or at the stores.

 

Once again, that was a great report. Have you read Paco Underhill's "Why we buy" by any chance?

[ClientNine]

I can't figure out how all this embedded quoting works for multiple passages, so I'm just going to take the questions one by one:

 

How stores were chosen and construction update: All store I've visited in Southern California are getting the store-within-a-store upgrades. All that I've visited have been in malls. There is at least one store in the area (city of San Fernando) that is a freestanding legacy store that is being closed. Amazingly, the local residents have been demonstrating in an effort to convince JCP to keep the store open. That's despite the fact that there is a mall store just a few miles away in Northridge.

 

Buffalo jeans: I agree. Not a great product and very little differentiation.

 

Arizona jeans: Locations differ depending on mall size and layout. They tend to be near parking lot entrances, as opposed to the entrances to JCP from the mall. In the mens section, they are near the Levi's display most of the time. In the women's section, they are not always right next to Levi's. There are wall racks, wall shelves, creative displays of belts and accessories, and good photography. Given the $15 - $30 price points on this merchandise, I think it will start to do well once JCP clears out the massive inventory of older merchandise that's currently on deep clearance elsewhere in the store.

 

Levi's: Demographics are broad, as you would expect from Levi's. One thing I didn't mention but should have: the Levi's store in the men's department seems to be getting a much bigger sales lift than the one in the women's department, at least at the stores I've visited this month.

 

My understanding is that each brand's store will have a look all its own. The Levi's table and fixtures are identical to displays in some of the Macy's I've visited -- clearly it's how Levi's is choosing to represent their brand across their sales channels. The Izod shop that will open in September has a very different look, which you can see in the Q2 earnings presentation on the JCP investor relations site.

 

Cosmetics: I haven't noticed MAC or Bobby Brown in the stores. I'll check this out more closely the next time I visit stores. I think there is an opportunity for JCP to allocate more floor space to cosmetics. Certainly higher end department stores like Macy's and Nordstrom allocate proportionally more SF to this than JCP, and the store within a store format lends itself well to growth in this area.

 

Womens apparel beyond jeans: Merchandise quality is improving. Lee jeans, various lines from Claiborne, and a few other brands are appearing in stores. But they have so much floor space devoted to clearing out old inventory, and odd choices like big sections near central elevators dedicated to massive amounts of unbranded brown purses, that they have a lot of work to do still. I think they have made more progress in men's apparel, but that may be my own bias since I'm a man and know what to look for more than I do for womens apparel. I'll be paying more attention to the womens section the next time I visit a store. Certainly some of the brands they've disclosed for the new stores, like Betsey Johnson, Vivienne Tam, etc. will help here. Compared to legacy inventory of Worthington, Claiborne, etc inventory in the stores, they have almost nowhere to go but up in womens.

 

Best,

C9