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JC Penney makeover fails to spark turnaround

(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."