retail news in context, analysis with attitude

by Kevin Coupe

Over the past year or so, I've been pretty critical of JC Penney. Even when the company went into a precipitous sales-and-profit decline under the stewardship of former Apple Store guru Ron Johnson and then turned control back over to Mike Ullman, the CEO who was replaced by Johnson, I felt that there was a lack of vision, strategy and that the company's seemingly complete reliance on promotions and discounts to get people into its stores was misguided. (I thought Johnson's goals were right, even if him implementation was, well, awful.)

So imagine my surprise when reading stories like this one in Fortune, saying that JC Penney "reported on Thursday that comparable sales rose 6% last quarter, beating Wall Street expectations. The results show that its strategy of going back to a heavy roster of promotional events and bringing back and expanding its own in-house brands is working to help it win back shoppers."

The story goes on to say that "Perhaps more important, the company, which a year ago was facing a severe cash crunch, said it expects its business to generate more cash than it believed it would earlier this year. Penney now expects to generate positive cash flow, rather than breaking even as per its earlier forecast, and it now expects to the end the fiscal year that concludes in early February, with $2.1 billion in cash, rather than $2 billion. During the quarter, it generated $76 million more in cash than it used, helping it build its cushion."

Furthermore: "Things have improved since Ullman gave even more floor space to popular house brands that Johnson had dumped, such as St. John’s Bay and reverted to Penney’s promotional tactics. Penney also ditched brands such as Joe Fresh and Michael Graves that failed to catch on with shoppers but which had been the centerpiece of Johnson’s strategy. Penney is done clearing out all that unsold Johnson-ordered merchandise and, with that merchandise now a distant memory, Penney’s gross margin rose 6.4 percentage points to 36% of sales, getting close to the 39% level the retailer used to hit regularly."

So, was I wrong?

Maybe.

Certainly the numbers were Eye-Opening.

But let's be clear. JC Penney's sales remain lower than they were even before Johnson got there, though it certainly can be argued that the company lost so much ground under his stewardship that it will take a long time to get back to where it was.

Also, the board is not so enamored with Ullman that it is keeping him on indefinitely. The company is conducting a search for a successor, and in fact tried to woo Brian Cornell, the former Pepsi-Walmart-Michaels-Safeway executive, who decided instead to become CEO of Target because he though JC Penney offered limited upside. (And that's putting it kindly.)

JC Penney's recent history is one of offering hundreds of promotions a year, sometimes with as many as two emails a day going out to customers. That may be working now - especially at a time when we can see that value-driven formats such as dollar stores and limited assortment stores are doing well - but the question is whether it is a long-term and sustainable strategy.

Look, there's no debating that JC Penney is having something of a turnaround. To be fair, considering all my criticisms, I though it was important to point that out.

But I remain unconvinced that the company has a real, differentiated and sustainable view of how it thrives long-term. I see JC Penney, and I think EJ Korvette.

But maybe that's just me.
KC's View: