J.C. Penney (JCP) on Tuesday reported a larger-than-expected first-quarter loss largely because customers were turned off by the retailer's new plan to get rid of heavy discounting periodically throughout the year in favor of everyday low pricing.
The idea of the strategy, which was rolled out on Feb. 1, is to discourage shoppers from waiting for the nearly 600 sales Penney used to offer each year. But the move has backfired: It seems many faithful Penny customers have stopped shopping altogether.
"Consumers want deals, and they're willing to wait for them," said C. Britt Beemer, chairman of America's Research Group, a consumer research firm. "When you train customers to shop at big discounts, that customer is not going to change."
Take Wendy Ruud, 49. She used to visit J.C. Penney near her home in Boca Raton, Fla. every two weeks. But she hasn't been back to the store since early this year when she stopped getting coupons from the retailer in her email inbox.
"The closest J.C. Penney is about a half hour away from me," said Ruud, who has been shopping more at Target and Wal-Mart. "If I don't get a special discount, it's not worth the trip."
Penney's disappointing results underscore how difficult it is for a company to fundamentally change the way customers behave. Industry watchers say Penney faces an uphill battle in attempting to shift the mindset of U.S. shoppers, who increasingly have become accustomed to and spoiled by fat discounts during the economic downturn.
So far, Penney's strategy hasn't been well received by shoppers. The first hint of that came last week when Karen Hoguet, the chief financial officer at Macy's, told analysts that the department-store chain was experiencing a pickup in sales at locations that share the same mall as Penney stores.
Then, Penney, which is based in Plano, Texas, affirmed that customers haven't warmed up to the strategy when it reported that it lost $163 million in the three months ended April 28. The company said revenue at stores opened at least a year - a figure used to measure a retailer's health - was down 18.9 percent. That's a much steeper fall than the 11.4 percent drop Wall Street was expecting.
Penney has said for months that it will take time for the pricing plan to work. But the poor quarterly performance puts pressure on new CEO Ron Johnson to deliver results at Penney, which has been hurt by the economic downturn as its core middle-income shoppers have cut back on spending.
Johnson, a former Apple Inc. executive who took the helm at Penney in November, has said he wants to transform every aspect of the department-store chain from the brands it carries to the way it positions them in stores. The pricing plan is the first and riskiest move yet by Johnson toward doing that.
Investors had put a lot of faith in Johnson, who was the mastermind behind Apple's successful retail stores and who also spearheaded the cheap chic strategy at Target in the 1990s. But they've soured considerably on the plan recently.
Penney shares soared 24 percent to about $43 after Johnson announced the strategy in late January. But since the middle of February - after the plan was rolled out in stores- investors have become increasingly nervous, sending shares back down to trade around $34. After Penney reported the disappointing first-quarter results after the markets closed on Tuesday, its shares fell 12 percent to $29.30 in after-hours trading.
Investors aren't the only ones watching how Penney fares with its new plan. If the everyday pricing strategy does well, other chains could adjust their pricing. Indeed, many clothing chains have been trying to figure out how to wean shoppers off of the big discounts that have become commonplace since the Great Recession began in late 2007.
"This is an ambitious task," said Chris Donnelly, managing director of Accenture's retail practice. "If Penney succeeds, (stores) will have to decide whether they'll follow."
In order for Penney's pricing plan to succeed, analysts say the retailer will need to do a better job at communicating it to consumers. The company has run ads since it rolled out its three-tiered pricing strategy that features everyday prices that are about 40 percent less than a year ago, monthlong sales on select items and clearance events during the first and third Friday of each month.
But some observers say Penney's ads - which mimic rival Target's whimsical style - are confusing. In one TV spot, for instance, a dog donning a birthday hat continuously jumps through a hula hoop that a young girl is holding. The text reads: "No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start."
"I think they're trying to be too cute and entertaining," said Laura Ries, president of Atlanta-based brand strategy firm Ries and Ries, which has worked with Walt Disney and Microsoft. "I think a more direct message would work better."
Analysts say that Penney will have an easier time conveying the everyday pricing plan once shoppers start to see new brands and other changes that the retailer is making in the stores.
For instance, in August, the chain plans to add 100 little shops within its stores that will either focus on one brand or a variety of labels. The shops, which include new brands such as Martha Stewart and designer Nanette Lepore, will replace the sea of clothing racks that have become typical in department stores. Penney also is planning to add areas in its stores called Town Squares to offer services and advice.
"I am rooting for Ron Johnson to hit a home run," said Ronald Friedman, the head of the retail group at Marcus LLP, an accounting firm that works with clothing companies. "But it won't happen overnight. This is a process. It will take between 12 to 18 months."