JCP - JC Penney

[PlanMaestro]

Much appreciated C9! Some general comments:

 

* This Xmas is lost: by the speed of the changes, slow by wall street standards and OK by retail standards while on a nationwide scale, it looks like this Christmas will be a bloodbath. The question is if Johnson is going to be ready for the next Xmas.

* Picking up low hanging fruit: he seems to know what he is doing. Jeans was a good department to start, and improving basics+jeans private label, cleaning up old inventory, and Sefora's runaway success, none of those moves risked much (except public SSS embarrassment that was coming anyway with the needed construction). Men apparel also seems to be non controversial and Izod looks good. I imagine Kid's with a heavy emphasis in private label might be next.

* SSS problems seem more about price confusion: I thought it was a about the store changes, but that seems not to be the case. Of course there was construction and there is always a transition period. But there were also clearances that should have provided a boost. If he is a good merchant, and he is, he will adapt.

* But construction will be a drag to SSS over the next months: Since he seems to modify 10% of the store at a time, that put 10% pressures on performance over the whole next year ... especially when you still have to change key categories and you're not going to be doing much 3 months before christmas. It will take at least till next year to see comps stabilizing

* He doesn't have the product yet: And it is all about the product. When he starts revamping the women apparel department or adding a big cosmetic brand, then we will know if he is gaining traction. Some early indicators might be the new jcp basics label and MNG.

 

Regarding women apparel, its delay despite being a key category might be a sign of either not finding the right brands with the current JCP reputation, or that the right balance in that category is not easy and there are easier picks. If it is the first one he might be screwed, because there is a catch-22 in that department.

 

BUT ... they got MNG even BEFORE Johnson so it seems to be the second. http://www.cbsnews.com/8301-505123_162-42643835/jc-penney-mango-deal-challenges-h038m-links-to-young-women-even-scarlett-johannson/

 

And a quick google got me this: http://www.thebudgetbabe.com/archives/4934-Off-the-Rack-MNG-by-Mango-for-JCP-July-Highlights.html And I have to say it looks very good if that is the standard.

 

So probably by this time next year there might be some early indication of a turnaround. Maybe more traffic at MNG, the new basics jcp brands, and announcements on women's apparel. I like what I see. Johnson's execution seems better than his talk, but it is too early to tell.

 

Plan

 

[PlanMaestro]

Liz Claiborne sold the brand to JCP and is now named Fifth & Pacific Companies. So it is now private label and something to watch.

 

* J.C. Penney Co Inc.  agreed to buy Liz Claiborne Inc.’s Liz Claiborne and Monet brands for $267.5 million, the company announced Wednesday. The Plano-based department store company already owns the U.S. and Puerto Rico rights to Liz Clairborne brands, but the new agreement will give J.C. Penney the worldwide rights to the Liz Clairborne brand portfolio, which includes brands like Liz, Liz & Co., LC, LizGolf, and Concepts by Claiborne.

* Incoming Chief Executive Ron Johnson said Liz Claiborne and Monet are "classic brands that resonate deeply with consumers." He said the brands give Penney "a strong foundation for continued innovation and growth."

* Penney is also paying Liz Claiborne Inc. $20 million to develop exclusive brands for the chain of 1,100 department stores.

* " If Liz Claiborne believed it could turnaround its flagship brand, it would not have set its exclusive license deal with JCPenney. Further, it would not then have agreed to the sale of the brand. Perhaps JCPenney has decided to buy a weak brand because it cannot afford more expensive ones. If so, it should not shop for brands at all." - an article comment

 

 

Some old 2010 interview with the CEO:

http://thehighlow.com/2010/08/qa-bill-mccomb-liz-claiborne-jcpenney/

 

Why is JC Penney the right place for women to shop for Liz Claiborne now?

 

The consumer is the one that led us to this decision. It would have been a risky decision three years ago, but from 2007 to fall 2009, with Penney’s exclusively selling the Liz & Co. line, we had the greatest test market of a national Liz brand strategy that you could possibly have. All of our research said that at JC Penney, the shopper who really wanted Liz Claiborne was finding the clothes she wanted and getting the value she needed. And the experience of shopping for Liz at Penney’s was improving that woman’s brand association with the Liz Claiborne name and with JC Penney.

 

Liz & Co. was consistently beating its forecasts, and the shopper was buying up every category at Penney’s, paying full price and telling us that she liked the brand more and more.

 

There’s a brand-aware Liz customer already there who’s willing to spend more money for the quality of the brand, and who’s even willing to go back into a Penney’s store that she hasn’t been to in a year because she wants Liz Claiborne. Liz Claiborne will be a destination within JC Penney’s.

[Sportgamma]

I must say that I find this one of the most interesting turnaround situations out there. I don´t know of any situation currently where a controlling shareholder/management has laid down their plan as thoroughly. I do like what they are trying to do, I think its very bold and it will take time to implement. Well, all that has already been discussed on this thread (which is becoming one of the really good ones, imo).

 

Does anybody know if (and if so, then how) the shop-in-shop concept will affect contracts/relationships with the vendors. Are vendors managing assortments and does JCP still carry all inventory risk? Basically, what happens when an assortment gets outdated under the new format? Does the vendor take back and move it to outlet channels? Does the inventory go some sort of a discount corner?

 

Thanks in advance,

 

Gísli

[PlanMaestro]

I cannot be of much help there. In Latin America, we had negotiation power but I am not sure that is Penney's case. So it depends on the specifics of the case and since it is just starting there is not much in the financials. Maybe someone else can fill in?

 

http://en.wikipedia.org/wiki/Vendor-managed_inventory

 

The only thing I found about that was while reading the initial exclusive agreement with the Liz Claiborne before they bought the brand.

 

J.C. Penney, starting in the fall of next year, will become the exclusive licensed seller of the company's Liz Claiborne and Claiborne-branded merchandise in the United States and Puerto Rico. In addition, the New York-based apparel maker said its more-upscale Liz Claiborne New York label -- designed by Isaac Mizrahi and currently carried by department stores including Macy's Inc. and Dillard's Inc.  -- will move to QVC. QVC, which has more than $7 billion in sales, recently said it's carrying the designer's IsaacMizrahiLive! collection.

 

The agreements would free Liz Claiborne (US:LIZ) from significant inventory risk, overhead, working capital and support-staff commitments while providing a minimum, predicable revenue stream.

 

So it seems like Liz Claiborne was carrying full risk initially and then Penney took over after getting exclusivity concessions.

 

 

[ItsAValueTrap]

I think that Apple's retail stores are phenomenal, yet it seems that Ron Johnson is running JC Penney into the ground.  Is this the same person?

 

Apple store:

-Always packed.  (Ok, so some people are there to steal free Internet.)

-Every employee is almost always talking to a customer.  No matter what time of day it is.  This is unusual compared to Apple's competitors.

-Sales per square foot is $5.6k/sqft compared to other retailers averaging around $300/sqft. e.g. http://www.appleinsider.com/articles/12/04/18/apple_stores_perform_17_times_better_than_us_retail_average.html

 

JC Penney:

 

-Massive drop in same store sales.  But somehow investors are supposed to have faith that things will turn around in the future.  The short sellers who have 40% of the float shorted clearly don't think so.  (If Ron Johnson was a great CEO, same store sales would go up right?  And you would do sensible things like testing your ideas on a small scale before rolling it out to every store.  And if you make a mistake, you learn from it and go back to the old better way of doing things... while constantly trying out other new ideas.)

 

-Customer alienation over the new pricing strategy.  Judging from comments on JCP's Facebook page, it doesn't seem like customers *like* the new strategy.  Most customers seem to be ok with it or disappointed with it.  The # of positive versus negative comments seems unusually low.

 

-Ron Johnson wants to replace all cashiers with self check-out by 2014?!?!  This is crazy.  I don't know about morale, but it might suffer because self check-out needs 1 employee for around every 6 self check-out kiosks.  (The checkout process is probably a little slower with self check-out.)  But basically RJ is saying that he wants to fire a huge portion of all JCP employees.  This is not going to be a fun place to work.

 

The other thing is that I haven't seen any retailer with 100% self check-out.  The self check-out process can sometimes be annoying because the process isn't always user friendly and may stall for random reasons.  Part of the problem is that the check-out kiosks have certain safeguards against theft/shrinkage.  So that are unintuitive things that you have to do... for example, if you are purchasing a heavy item, you have to leave that heavy item on the scale... then you check everything else out... then you move that heavy item back onto your shopping cart.

 

Self check-out stops some forms of shrinkage but makes other forms of shrinkage easier.  JCP will need a good workforce that is trained to deal with this new process... otherwise shrinkage can really hurt them.  Some retailers have tried self check-out only to abandon it.

see http://ryenyc.tumblr.com/post/12168455855/why-doesnt-self-checkout-work

 

-Some shoppers will be hugely alienated by self check-out.  There are a lot of folks out there who have difficulty using a computer and dealing with new technology.  And there are a lot of folks who will get very frustrated at unintuitive aspects of the self check-out process (you have to put everything on the scale... even if it's really heavy or you are only buying one item).

 

I don't get this strategy.  (Now I've read Sam Walton's biography on Walmart and people did say that he was crazy.  Sometimes "bad" ideas will work.  But so far, Ron Johnson has not demonstrated ideas that work.  Otherwise same store sales would be higher.)  I'm almost inclined to join the short sellers here.

[PlanMaestro]

Sounds familiar? (watch the stock price DDS)

 

Dillard’s: A department store on sale for investors

http://www.theglobeandmail.com/globe-investor/investment-ideas/dillards-a-department-store-on-sale-for-investors/article4483155/

 

“Over the past three years, Dillard’s has worked to move its product offering more upscale, focusing on the market opportunity between Macy’s and Nordstrom, targeting a higher-income demographic and battling more on fashion than price – separating itself to an extent from moderate peers Macy’s, JCPenney, and Kohl’s,” said Matthew Boss of JPMorgan Chase & Co.

 

“From a merchandising perspective, the company lightened inventories … beefed up customer service and introduced a number of new brands,” he said.

 

Mr. Boss says his store visits in the recent quarter indicated the company rolled out Under Armour products in its Boys section (with men’s and women’s products to come); Swatch watches; True Religion fragrances; and Kenneth Cole and Marc Echo menswear.

Analyst Jason Asaeda of Standard & Poor’s says Dillard’s has “pursued a real estate strategy of entering or further penetrating markets in which it believes it can become the dominant conventional department store operator.” Picking spots with low occupancy costs “present an opportunity to generate higher profits on less volume,” he says.

 

The results: Dillard’s has now beaten Wall Street expectations in 12 of the last 14 quarters, after missing them nine quarters in a row over 2007-2008.

 

Despite the track record, Dillard’s is not expensive. With recent trades around $74, the forward price-to-earnings is around 11; Kohl’s Corp. and Macy’s Inc. trade between 10 and 11, according to Standard & Poor’s CapitalIQ. Nordstrom Inc. is at 15, and J.C. Penney, despite its fall, is still at 20. Saks Inc. tops 26.

 

Dillard’s enterprise value, or market capitalization plus net debt, is about 5.4 times forward EBITDA, or earnings before interest, taxes, depreciation and amortization. Kohl’s is at 5.3 times, but every other North American department-store chain (the previously named companies, plus Sears Holdings Corp. and Sears Canada Inc.) is more expensive on this basis.

[ClientNine]

DDS is a great example for people who want to think through the opportunity at JCP. The focus on high quality brands, dominant small town real estate, and regional concentration is definitely something that JCP can emulate. They can't, and don't need, to go as upscale as DDS has in order to succeed.

 

Just as JCP is making its changes under the protection of large shareholders like Vornado and Ackman, DDS transformed itself at the urging of Southeastern Asset Management. I don't think the company would be what it is today without the focus on capital allocation that the Longleaf guys brought to the company.

 

Best,

C9

[txlaw]

Interesting.  Former JCP head on new strategy:

http://video.cnbc.com/gallery/?video=3000109947&play=1

[mpauls]

I don't intend to invest in this one (b/c lots of alternatives) but I think Ackman is likely to make good money here.  Also, While I was at Potomac Mills, which is an outlet mall in Northern Virginia, I went into a newly renovated JC Penny which happens to have a store in the mall.  I was blown away by what they've done. If you walked into the store blindfolded you would have no clue where you were.  It was very nice inside.

[BG2008]

A few of us have mentioned valuing the real estate that JCP owns as downside protection. I have been giving this idea some thought and have come to conclusion that we should analyze the real estate in a best case scenario.  One only needs to look at Syms Corp to get a sense of what happens to the liquidation value of the real estate associated with a failed retailer.  Syms has incurred massive losses by liquidating their inventories at fire sale prices, winding down its operations, restructuring fees, and cure cost associated with breaking leases on spaces that they lease rather than own (about 1/2 of the square footage).  Now Syms is liquidating its real estate assets, 18 in total, but has to overcome more than $155mm of liabilities before any equity recovery.  The final payout to shareholders is still to be determined and likely 2+ years away.  Many value investors in the past has touted that Syms is a safe investment due to its large real estate holdings.  I don't see anything safe about having to hit a hurdle of $155mm before any equity recovery. 

 

By comparison, JCP owns a much larger number of assets (likely 25x as many) and if JCP fails to turn around its strategy, I can't picture the market being able to absorb the inventory of big box real estate spaces now that similar size boxes like Sears, Best Buy, JCP, any electronic retailer in general, are flooding the market. 

 

On the other hand, if JCP were to turn around its retail business, I can see a situation where JCP may spin-off its real estate holdings into a REIT vehicle.  Since Ackman has gotten involved in a lot of real estate plays, I can picture this happening.  While this is akin to adding debt to the balance sheet, the key is to do this when JCP is a very healthy operating business that generates substantial cashflow.  The spin off of the RE business is what could add 2x turns to the stock price ($12bn RE valuation versus 5.25bn MC). 

[maxprogram]

A good article on "Genius training" at the Apple stores:

 

http://gizmodo.com/5938323

 

I think this type of training and interaction with customers contributes much more to the experience (and Apple's profits) than people think. My guess is that Johnson and his team were mainly responsible for these initiatives.

[eclecticvalue]

A few of us have mentioned valuing the real estate that JCP owns as downside protection. I have been giving this idea some thought and have come to conclusion that we should analyze the real estate in a best case scenario.  One only needs to look at Syms Corp to get a sense of what happens to the liquidation value of the real estate associated with a failed retailer.  Syms has incurred massive losses by liquidating their inventories at fire sale prices, winding down its operations, restructuring fees, and cure cost associated with breaking leases on spaces that they lease rather than own (about 1/2 of the square footage).  Now Syms is liquidating its real estate assets, 18 in total, but has to overcome more than $155mm of liabilities before any equity recovery.  The final payout to shareholders is still to be determined and likely 2+ years away.  Many value investors in the past has touted that Syms is a safe investment due to its large real estate holdings.  I don't see anything safe about having to hit a hurdle of $155mm before any equity recovery.   

 

Thanks for posting. I have more questions regarding syms. So the reorganization will include 18 properties. If so that is great because the trinity property from what I hear is worth a lot. Since it will have management in place they can take time and sell it. Although the management will be earning a yearly salary. At the current price it is probably not the time to get in. You are right it will take awhile before shareholders will realize value. There are some great people on the board.

 

I am sorry this is not about JC Penney, but I had to talk about syms. Since I have been looking into it recently. I would like to continue this conversation in the syms thread. If you don't mind BG2008.

[PlanMaestro]

We have to reinforce that we're not a promotional department store - Steve Sadove, Saks CEO

Discounts Will Be Few and Far Between at Saks

http://www.smartmoney.com/invest/stocks/discounts-will-be-few-and-far-between-at-saks-1346171153784/?link=SM_mag_invest&mod=sm_mag

[farnamstreet]

An excerpt from William Ackman's latter missive commenting on JCP

 

http://myinvestingnotebook.blogspot.com/2012/08/ackman-on-jc-penney.html

[PlanMaestro]

An excerpt from William Ackman's latter missive commenting on JCP

 

http://myinvestingnotebook.blogspot.com/2012/08/ackman-on-jc-penney.html

 

It is a good letter but why I always get the impression that Ackman tries to put everything in the best light possible (ie: Borders)? And it is not like he HAS to do it to take control of the company, he already has control.

 

 

The JCP bears’ principal argument rests on additional dramatic declines in sales contributing to balance sheet deterioration at the company. In fact, JCP’s balance sheet is equipped to handle even a large decline in sales for several reasons. Unlike most other retailers for which rent is an enormous fixed cost, JCP’s real estate cost is very low because it owns 50% of its stores and leases the balance at low single-digit rents. The company also benefits from long-term, low-cost debt with limited expirations over the next several years, more than $800 million of cash at the last quarterly report, $1.5 billion of undrawn revolver capacity, and more than $600 million of non-core assets that it can sell.

 

Isn't this basically the same situation as SHLD, maybe even worse?  But still. the decline of sales and cash flow can be a big issue.

[Kraven]

It is a good letter but why I always get the impression that Ackman tries to put everything in the best light possible (ie: Borders)? And it is not like he HAS to do it to take control of the company, he already has control.

 

I actually think Ackman is one of the more intellectually honest of the hedge fund managers.  Many pay lip service to buying and being ok waiting for years for the story to play out, but when push comes to shove they will dump a stock that misses earnings by 2 cents.  Ackman gets in there and does what he says.  Besides, in terms of putting things in the best light possible isn't that what everyone does to some extent?  I mean when was the last time you read someone write about a huge position they have and say "yeah, well, it's a total POS but what the hell, we put 10% into it anyway just for laughs."  But you're right about Borders.  He was a big fan right up until the point that they were selling fixtures 3 for a dollar. 

[PlanMaestro]

I actually think Ackman is one of the more intellectually honest of the hedge fund managers.  Many pay lip service to buying and being ok waiting for years for the story to play out, but when push comes to shove they will dump a stock that misses earnings by 2 cents.  Ackman gets in there and does what he says.  Besides, in terms of putting things in the best light possible isn't that what everyone does to some extent?  I mean when was the last time you read someone write about a huge position they have and say "yeah, well, it's a total POS but what the hell, we put 10% into it anyway just for laughs."  But you're right about Borders.  He was a big fan right up until the point that they were selling fixtures 3 for a dollar.

 

You are right, Ackman has a long term view despite his activist short term annoyance factor . Also the favorable light may come with the territory, I would be doing the same if I was taking large stakes and stay with them till the end. I remember being annoyed when reading on Tepper's cutting on Delphi after making so much noise to get a seat on the table.

 

Activism does not show the best of people ... almost like war in a way.

[mcliu]

An excerpt from William Ackman's latter missive commenting on JCP

 

http://myinvestingnotebook.blogspot.com/2012/08/ackman-on-jc-penney.html

 

It is a good letter but why I always get the impression that Ackman tries to put everything in the best light possible (ie: Borders)? And it is not like he HAS to do it to take control of the company, he already has control.

 

 

The JCP bears’ principal argument rests on additional dramatic declines in sales contributing to balance sheet deterioration at the company. In fact, JCP’s balance sheet is equipped to handle even a large decline in sales for several reasons. Unlike most other retailers for which rent is an enormous fixed cost, JCP’s real estate cost is very low because it owns 50% of its stores and leases the balance at low single-digit rents. The company also benefits from long-term, low-cost debt with limited expirations over the next several years, more than $800 million of cash at the last quarterly report, $1.5 billion of undrawn revolver capacity, and more than $600 million of non-core assets that it can sell.

 

Isn't this basically the same situation as SHLD, maybe even worse?  But still. the decline of sales and cash flow can be a big issue.

 

I'm not too sure about the SHLD story, but I thought a main culprit was that a lack of capex? Whereas JCP seems committed to spending to change its business?

[PlanMaestro]

Great documentaries about JCrew and Drexler. And you can see why it is difficult for the large department stores to compete: details, details, details.

 

J.Crew and the Man Who Dressed America

http://www.styleite.com/media/j-crew-mickey-drexler-cnbc/

 

JCrew goes to Italy

http://www.styleite.com/retail/j-crew-goes-to-italy/

 

Other stuff

Drexler, Jobs and Johnson http://www.cnbc.com/id/47520270

Financial Times http://www.ft.com/intl/cms/s/2/bcf99a3e-fb01-11e0-bebe-00144feab49a.html#axzz1vXn8tk1R

WSJ http://magazine.wsj.com/features/the-big-interview/retail-therapist/

Bloomberg http://www.youtube.com/watch?v=9F-AKnAJjyI

Charlie Rose http://www.charlierose.com/view/interview/9050

Boston University

(WATCH THIS LAST ONE, the men vs women apparel part is great, the problems of size and growth, and dealing with wall street)

[ClientNine]

I popped into my closest mall an hour ago to see the new store concept at JCP. As you know, the September store openings were JCP house brand (men's and women's), Liz Claiborne (women's) and Izod (men's).

 

General thoughts:

 

This batch of store concepts was executed better than last month's stores (Levi's, Arizona, Buffalo Jeans). At all three concepts, merchandise quality is vastly improved from before, and visual presentation is improved even more. JCP house brand feels like Gap merchandise from their 90s heyday: simple, casual, colorful, fun. Gingham shirts, cotton sweaters, brightly colored chinos, even a decent wool flannel blazer at $100. The Izod stores were built around athletic wear: rugby shirts, golf clothing, etc. and lots of graphics of young men playing football and lacrosse on the beach. If you crossed H&M with A&F, the Izod store at JCP would be the result. The Liz Claiborne area was large and well-presented, though it suffered from the massive amount of legacy Liz Claiborne merchandise displayed elsewhere in the store in the more traditional JCP manner.

 

The product is good, but more importantly I think, the way the product is sold and displayed is just such a massive upgrade for JC Penney. There is strong vertical interest in all of the new stores, with raised mannequins, attractive lighting, big colorful piles of inventory, wall displays, etc. Izod and JCP both used all white paint and blue/white lighting for a bright, cool display. Claiborne had oversized, bright yellow doors bursting open in 3D to frame a couple of mannequins outfitted in the best new inventory. The presentation is night and day better than anything JCP has done before, and Kohl's and Sears are going to look 30 years out of date when the entire JCP store looks like this.

 

If these brands are indicative of what future build-outs at JCP are going to look like, JCP is going to have the best merchandise, in the most attractive sales layouts, in their mostly class B and class C mall stores. Even in Class A malls they will be able to attract shoppers with better quality merchandise than they've ever had before, merchandise that will compete well against all but the highest end or most fashion-forward stores (i.e. Zara, Banana Republic, J Crew).

 

The problem:

 

Price points for non-sale merchandise at the new boutiques feel like they're on average 25% to 33% higher than non-sale merchandise elsewhere at JCP. At the same time, they're competing with the massive amount of legacy clearance merchandise that's clogging the stores right now. I did not see any noticeable decline in square footage devoted to clearing out this inventory. The good news is that most of the old stuff is being sold for under $10 and has already been written down to that value on the balance sheet. The bad news is that it's either selling slowly, or JCP just has MOUNTAINS of the stuff.

 

More importantly, the new stores within a store, selling demonstrably better merchandise, are ghost towns. This is especially true in the women's section. Wandering around the store today, I did not see a single woman shopping for Levi's or JCP product, and only a few looking at the new Claiborne line. In the men's section, the Levi's store continues to be a bright spot, with high traffic and clear success, but nowhere else. Even Arizona hasn't seen a pickup yet, since why would the typical Arizona customer buy any of that product when there's $5 t-shirts to be had all over the store.

 

I am coming to the conclusion that JCP is an old customer/new customer story. And that's really hard, because how do you get the new, younger, more affluent buyer into a JCP store, given the brand's historical baggage. The typical customer is an overweight, undereducated, frumpy mother of three. The new merchandise appeals mostly to her 21 year old daughter. But that 21 year old daughter would die of embarrassment before shopping at the same store as her mother. JCP is going to have to figure out how to spend their $800 million ad budget to get that 21 year old into the store. Once she's there, there's good stuff for her. And her boyfriend.

 

Other thoughts:

 

In the one store I visited today, there are no sections of the store blocked off for future store build-outs. I presume they want all their square footage selling for the three day weekend and that they will resume construction next week. The stores look much nicer without the white tarps blocking off the construction areas.

 

Also, JCP should never allow another cheapo brand conversion like Buffalo jeans. I can't imagine that they spent even $10K per store to upgrade the tables and signs for this boutique from last month's batch of conversions. And I have yet to see a customer actually buy a single pair of Buffalo jeans. Compared to Levi's, JCP house brand, Izod, and Claiborne, the Buffalo conversion was a waste. If they can keep up the level of quality in merchandise and merchandising for their ongoing conversions, JCP will really have great stuff to sell. So again, I think the key risk here is moving toward the marketing and getting the new customer in the door.

 

For Q3, traffic levels continue to look strong, but almost all of this is going to center of the store clearance merchandise. For that reason, I think comps will be in line with Q2 (-21%) and that operating income and OCF should be positive, unless there is another write-down.

 

If I were Ron Johnson, I would spend 80% of my time on advertising right now. With the store roll-out cadence largely booked for the next two quarters, the most urgent priority for JCP is to tell America about the fact that they now have killer product. He is speaking at an investor conference next week; I hope to see signs that he is addressing this issue fast.

 

Finally, a question: JCP has not said which stores will be rolled out for October 1, as far as I know. Anyone heard who they're going to be?

 

Best,

C9

[oddballstocks]

I am coming to the conclusion that JCP is an old customer/new customer story. And that's really hard, because how do you get the new, younger, more affluent buyer into a JCP store, given the brand's historical baggage. The typical customer is an overweight, undereducated, frumpy mother of three. The new merchandise appeals mostly to her 21 year old daughter. But that 21 year old daughter would die of embarrassment before shopping at the same store as her mother. JCP is going to have to figure out how to spend their $800 million ad budget to get that 21 year old into the store. Once she's there, there's good stuff for her. And her boyfriend.

 

This is the crux of the problem for me, and why I've stayed away.  I mentioned JCP's new strategy to my wife and she said "I'd never shop there."  I said they'd have new brands and a new format "doesn't matter."  So the question is how do you capture those new customers?  If they can do that I think everything else rolls smoothly with it, otherwise they've alienated their current customers and don't have anyone to fill the breach.

 

ClientNine, your updates are incredible, are you in there taking notes or something?

[Mephistopheles]

I think in business, economics, and politics, people have short memories. Investors underestimate the power of marketing and brand imaging. While most customers don't think of JCP in a positive way, I think that will change with their branding overhaul. It will take some time, but people will forget the old image. There was a time when owning an Apple computer wasn't cool, but now people are addicted to their products. Customers like having a quality experience at a fair price, and that is exactly what JCP is offering. I would argue that it will be easier for them to change their image in the minds of customers than it is for other companies, because they are only a shop selling other company's brands. Having Levi's, Sephora, and other good brands under their roof will do some of the work for them.

[PlanMaestro]

So the question is how do you capture those new customers?  If they can do that I think everything else rolls smoothly with it, otherwise they've alienated their current customers and don't have anyone to fill the breach.

 

ClientNine, your updates are incredible, are you in there taking notes or something?

 

These updates are fantastic. C9 for president.

 

Regarding Oddballstocks' comment ...my wife responded with the same negativity.  Only Sears would have done worse.

 

But then I said Sephora ... and she gave me the benefit of the doubt to start a discussion (some wine helped) and managed to convince her to discuss possible ways of going from there (maybe she saw the possibility of a "field" trip)

 

We will throw one possibility, but I have to say to feel retail turnarounds in site is difficult ... from a distance is right next to impossible.  And if you ask retailers they will always have strong WRONG opinions. Retailers are worse than economists, you ask two of them what they think about something and you get ten opinions and all barely supported.

 

What they excel in is in changing and adapting fast.

 

Let me suggest one WRONG opinion: we think Johnson will entice the mall customer with temptations in each step of the way. Hey, JCP has achieved the most difficult part, to get people to walk there and actually cross that door. Thanks Sephora. (and another great cosmetics brand would also help)

 

What to do next? Well first of all what not to do, no piles of discounted old merchandise at the door that blocks the entry. You need a clean "street" in Johnson's words. That kind of merchandise moves through special events highly promoted and advertised on specific weeks.

 

Then first big step. A big temptation right next to Sephora. A great shoe store. And right next to the shoe store a great bags store. Or vice versa. No private label here, something that completely catches the attention of that young, or not so young, women shopper.

 

At that moment you have broken the ice, she is actually in the store.

 

She notices dimly at the distance MNG and maybe other brands that she recognizes. The customer that was expecting to spend 15m just for Sephora is now staying for half an hour. And while she is looking she notices a nice white blouse and an OK black dress ... the label say JCP but who cares with basics. Sharon Stone shocked once everyone wearing a GAP shirt to the Oscars but this is 15 years later. And now our shopper starts to wonder ... is there anything for the kid? Hey there is Carter's.

 

If you achieved that you've won that battle. The problem is how to achieve that w/o completely losing the old "full price" customer. It seems that Liz Claiborne might be a key.

 

Let me call this customer, the Liz Claiborne customer.

 

It seems that the Liz Claiborne customer is a destination shopper. If that is the case she will probably park next to the store ... with no difficulty because it is still empty. You receive her with your JCP private label just in case and another more upscale private label. And only then you have the large Liz Claiborne store (that by the way, it is also private label). From then on .... there is no much need of segmentation. She will also see Carter's for her grandchildren and Home is for everyone everywhere.

 

If that kind of segmentation works and different paths are achieved, the store can evolve and accommodate these different customers. But the Liz Claiborne customer wants the Liz Claiborne product ... and I hope these new Liz Claiborne stores are outright better because new is not going to help.

 

What about the discount shoppers ... you still need them to move the merchandise but  there are ways to segment them. Besides, that is not our main problem.

 

So we think there is at least one way to move forward, and maybe there are more ways, but not while there is all this discounted merchandise around. Advertising your new toys might be a complete waste. And to advertise the discounted merchandise can be counter productive if you do not spin it right with few one-off big event.

 

This option could take time the way things are going. Johnson has been pushing down the road the new stores for Women. I read that lingerie is coming but that is not what we are talking about here.

 

Until you start to see movement in this department all predictions of success are temptative. Other departments are much easier to improve and carry less risk, also there is no use to start taking some risks while still moving discounted merchandise, but here in Women is where the battle is won or lost.

 

Johnson has to start to manage expectations because it looks like there are no early wins in sight just small improvements that are not showing in the SSS for a year or so. I suspect he thought the new pricing strategy might have been that win ... but it is not.

 

And this Christmas is lost.

 

 

 

 

 

 

[ClientNine]

Responding to a few points Plan has brought up:

 

Discontinued clearance merchandise at the front of stores: You're absolutely right about this point. Between that, and the construction walling off portions of the store, JCP stores do not look high end right now. I did notice at tonight's store visit that clearance was more in the center of the store than in the front, but I don't remember if that's a change for this location or not. Once you've visited more than a dozen JCP stores in a month, they all start to blend together.

 

Shoe store and bags store: There's a massive need for improvement here. JCP tends to put giant piles of big, heavy brown purses and bags around their escalators, usually with the bags on one side and the jewelry on another. Inventory levels are huge, and the merchandise is ugly. Think of skinning Jabba the Hutt, gluing on two handles, adding a brass buckle or zipper, and slapping a Liz Claiborne name plate on it. That's how ugly this shit is. I imagine that a little piece of Tim Gunn dies each time he approves this merchandise. But again, there's traffic here and I see transactions regularly. Customer COME HERE to buy this stuff, specifically.

 

Speaking of Tim Gunn, he's one of the best-known fashion celebrities in America, he's wildly popular among exactly the types of women that JCP needs to attract to their stores, and he's Chief Creative Officer for Liz Claiborne. And he has ZERO presence in JCP advertising or brand building. How on Earth is that a good idea?

 

Women's shoes has had fairly good traffic in all the stores I've visited, but I haven't spent too much time observing sales trends or brands. I know very little about women's apparel; when it comes to shoes, I know even less.

 

You mentioned Carter's and the kids section: Big opportunity here. Obviously when Carter's arrives that will improve merchandise quality by a huge amount. I looked at Carter's but passed on the stock 18 months ago. Oops. Back to JCP, a huge portion of their traffic and transactions are families buying for kids. I haven't mentioned it much because I think I'm seeing seasonal back to school shopping, and I want to get an idea of what this section will look like in October when you don't have that seasonal boost. But clearly families need a place to buy fun, affordable clothing for their kids, and there are surprisingly few places in the mall for that today. Current JCP merchandise is not great, but they haven't added a new boutique store for kids yet, so we'll see.

 

Liz Claiborne: It's hard for me to assess the quality of their merchandise. That said, JCP has an obvious need to dial back the square footage they assign to Liz Claiborne. Back when they couldn't get any other brands to sell in their stores, they must have decided to slap a Liz label on whatever crap Li & Fung would unload on them on the docks of the Pearl River delta. It's just rack after rack after rack of this stuff, to say nothing of the Jabba the Hutt purses with that reproduce like Tribbles, complete with a Liz Claiborne faux metal label. To me, the brand looks stretched to its limit. For the brand's long term health, I think they would be better going with a more curated, limited selection. The square footage dedicated to all this Liz litter should be re-allocated to other merchandise, even if that means they have less SF dedicated to exclusives wares.

 

Lingerie: lot of square footage dedicated to that. JCP appears to sell a ton of this basic wear to a lot of women. I haven't spent too much time in this section since I don't want to get arrested or slapped.

 

A general thought on stores: Over on VIC, there's a good write-up of A&F here: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/75051

 

What's interesting to note is that US A&F stores have gone from a peak of 360 in 2006 to just 280 today. Gap has reduced stores as well, and other brands have reached a saturation point. This has left a real interesting hole in the market that JCP is poised to exploit. In a lot of the Class B & C malls that I've visited, there is no Gap, zero or one teen retailer, no Ann Taylor, no Express, etc. They just haven't been able to make their four walls unit economics work in B & C malls with their real estate costs. But there is a JC Penney, sitting on legacy real estate selling dated merchandise. As they roll out product upgrades like the ones I've been seeing, they're going to go from being a sad part of a sad mall, to the best place in B & C malls to get really interesting clothing. They are going to have a large part of their customer base almost entirely to themselves. And it will work for JCP because of the structural advantage they have in their lower real estate costs.

 

Again, you run into the old customer/new customer problem here. The kind of people who would appreciate this new product drive past these Class C malls to visit the Class A Westfield mall 20 minutes away. How do you get them back into the mall where only their aunt on SSI disability shops? If JCP can do it, they'll have a helluva moat around their business because we've already seen that other companies can't make the ROIC positive on opening stores in these kinds of locations. That also suggests that the 400+ legacy JCP stores (mostly off-mall and in small towns), which are not receiving the store within a store upgrades on the current plan, could be candidates for upgrade after 2015. If so, it would take legacy assets that everyone considers assets to harvest for cash and invigorate them in a way that's in nobody's models today.

 

Again, the big risk here is marketing and old customer/new customer. They've got the Tea Party. They need Beliebers.

 

Best,

C9

[paologorgo]

C9,

 

thanks for your updates and comments. Highly appreciated.