JC Penney makeover fails to spark turnaround

A shopper leaves a J.C. Penney store at the Ford City Mall on January 26, 2012 in Chicago, Illinois. / Scott Olson/Getty Images

(MoneyWatch) Great things were predicted when JC Penney (JCP) hired Ronald Johnson as CEO a year ago. He was expected to bring the same retail magic that he once worked as a top executive at Apple (AAPL) and Target (TGT). So far the magic is missing. The retailer's performance has been so bad it faces a possible credit downgrade, hardly a ringing endorsement for a company supposedly in turnaround mode.

In January, Johnson announced a new strategy for the chain that did away with the hundreds of sales events it was once known for. Instead, Penney emulated WalMart's (WMT) approach of emphasizing everyday low prices. In a stroke, the company marked down all of its merchandise by at least 40 percent and played up that shoppers don't have to wait for a sale to get the best deal.

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The shift in strategy was part of a broader move to remake the image of the struggling retailer, which had come to be seen by some consumers as a boring, down-market version of Sears (SHLD). Johnson has tried to do for Penney what he did at Target, which he transformed by partnering with upscale designers that made it chic to be cheap.

At Penney, Johnson has sought to recreate this approach this by adding brands like the Mary Kate and Ashley Olsen teen clothing collection. He also has tried to give it a distinctive, hipper public image as the most gay-friendly big-box retailer. When the company was attacked by social conservatives for hiring openly lesbian comedian and TV personality Ellen DeGeneres as its spokesperson, Penney loudly and proudly defended her. It has also drawn fire for Father's Day ads featuring a real-life family of two dads playing with their two kids.

Yet this higher profile hasn't translated into more sales.

Indeed, despite Penney's image makeover, customers have been staying away in droves. Last month the company reported a larger-than-expected first-quarter loss, raising doubts about the retailer's new pricing strategy. It lost $163 million in the three months ended April 28. Revenue at stores opened at least a year -- a figure used to measure a retailer's health -- was down nearly 19 percent, a significantly steeper decline than analysts has expected. Penney shares have fallen from a 52-week high of $43.18 to less than $25, a 42 percent plunge. The stock price is down more than $10 since Johnson assumed command at at the company in June of 2011.

Penney's financial problems led Fitch this week to lowered its rating outlook for the company from "stable" to "negative," implying the risk of a downgrade. Analysts with the credit rating agency said Penney faces significant risk over the next year in executing its new strategy, as the company tries to address weaknesses in key areas such merchandising, costs, and investments in its store network.

The company has also begun walking back from its new brand-focused sales model. Johnson on Wednesday announced that Penney would again start using the word "sales" in its advertising. He also acknowledged mistakes in how Penney handled its strategic shift earlier this year.

"Everything we've done hasn't been perfect ... We haven't communicated our pricing change in a way that customers understand yet," he said in an address to investors at the Piper Jaffray Consumer Conference. "It's just been kind of confusing."

[Jaylah54100]

Well, it wasn't much of a "makeover" to start with, was it?

They ran a bunch of ads saying they weren't going to do "sales" anymore, and then next thing I saw was an add for a "sale" at Penney.

[venusvegasvada]

Penny and Sears had a customer base that was the middle class.

Walmart and K-Mart cater to the lower to middle classes.

As the middle class continues it's march into the history books in the US, retailers simply need to figure out which of the leftover classes they want to chase:

Lower classes or the Rich. Those are your two choices. If your going for the middle class, your chasing betting on a dying horse in the US.

[gangstalook1]

Dear JC Penney and Sears,
I used to be a customer of yours, but then Walmart and Target created supermarkets in their stores and you've failed to imitate or copy this concept. Targets Meats are way too expensive, and some Walmart Stores prices were way too high (BUT) they are getting back to their original message of being the cheapest and I will start going back(due to commercials). If JC Penney fails to add a grocery section and just rely on Fickle children and the Gay Hype- soon they will go out of business. What makeover if you can't at least entice us into the store? Food Commercials and Advertisements work especially if your prices are good- I'd say dump some of the clothes section and make a grocery section like FAST!!!!

[yarnplay]

Still not clear on the concept. If you want to rebuild JCP use the strategy that worked before. Hire a pro retailer, experienced in department store retail. JCP did this years ago and upgraded their stock and style and gained some credibility. Hiring some celebrity CEO who has no clue what it's like to shop for a family or the mentality of a sale/bargain shopper isn't going to do anthing but waste time. Apple-shmapple, we're talking schmatta's here!

[AOCGUY]

What the heck does the "most gay-friendly big-box retailer" mean? Do they offer discounts if you show your Gay Card?

[IAMCS]

I am unsure whether this down turn had anything to do with this very "open" advertisement of alternative lifestyles;however, I do not think it is a smart move for any business to become a soap box for something so controversial. I am for equal rights of all people and see nothing wrong with homosexuals just as I see nothing wrong people born heterosexual. This does not take away my keen business sense. I saw absolutely nothing wrong with Ellen becoming spokesperson. I do see something wrong with her becoming spokesperson just because she is gay (if that is the case). And, it does appear to be the case when you take into consideration the Father's Day event with 2 gay fathers. So, perhaps people will see JC Penny as attempting to use their acceptance of gay people as a selfish ploy to gain more business. This, then could have backfired. They should have just kept the controversy to a minimum and concentrated on selling good product for reasonable prices.

[susanspotless]

I believe in live and let live and hold no bias against anyone of race, creed, color or sexual preference, but I feel JCP has gone out of their way to use GLBTs for corporate greed. They also had a 2 mom family with children in their flyer for Mother's Day. I have always felt this was a marketing ploy and to look at their facebook page there are many people praising their support of GLBTs and promising to shop there. If they are it is not making a difference in store traffic or sales revenue.

[Transatlantique]

Newsflash! No one is born straight or gay. We are born sensual, and we make a choices for one, the other, or both based on where we find the most comfort and acceptance. However, social influence has much to do with it as well. A kid can grow up hearing that he is gay, and then be more likely to decide that based on the societal influence. It is different for everyone, and just because someone feels different, it doesn't automatically mean gay.

[IMP578]

I agree with a previous comment - I am so sick and tired of the same lousy quality clothes in all the stores. All this cheap 'made in China' crap that doesn't hold up. They used to sell wonderful side zip flat front cotton pants. I bought tons of those for the summer. Now all you find is the same unflattering garbage everybody else has. Price is not everything. How about increasing the quality of the products. I couldn't care less about a spokes person or gays, I am looking for quality products. When is it going to dawn on retailers that quality matters?! I'd rather pay more for a quality item than a reduced item that fits poorly and falls apart after the first wash.

[DaisyZoey]

I agree with this comment completely and I used to love those cotton side zip pants too! Can't find them anymore anywhere either (for a reasonable price anyway)! Yes the quality of the products is what would make a difference to me as well as not the same ol same ol you see everywhere else!

[MichaelSurf]

I am totally gay friendly, totally ok with gay marriage etc etc..but the fact is JC Peneney is JC Penney. Not for anything they cater to a customer base that isnt exactly fashion conscious for the most part. Most gays wont be shopping at Penneys any time soon. They are known as the place your grandparents shopped at ( get your grandpa a nice shirt at Penneys for fathers day) or overweight middle class women. It is what it is. Its not about sales, it is not about pricing really...its abour perception. I dont see gays going to JCP just because Ellen is a spokesperson.

[Mialilly]

Too bad they didn't drop their prices 40% like they said they would. I checked on a pair of sneakers in January that cost $65. I thought I would wait until February to order them when the new pricing started. On February 1 when the new pricing kicked in, guess what? The sneakers cost $65. Where's the 40% drop?

[susanspotless]

They only said they would drop 'most' prices by 40%, a sales gimmick to get you into the store ;)

[Mialilly]

Too bad they didn't reduce their prices 40% like they said they did. I checked a pair of sneakers in January that cost $65. I thought I would wait until February when their new pricing started. On February 1 when their new pricing kicked in, guess what? The sneakers still cost $65. Where's the 40% off?