Sunday, August 12, 2012

A Tale of Two Retailers

 We present below excerpts from analyst presentations by two retailers. 
 The first is an old, well-known department store chain, and the presentation was made last September, when its long-time CEO spent an hour or so ruminating about the transformation of his company.
 The second is more recent—like, this past Friday.
 And it’s by JC Penney, or “JCP” as its new-age executives insist on calling it—a misguided nod to the company’s stock ticker, which seems to be the one thing those executives understand about the company and its now-muddied 110-year old relationship with the American consumer…a relationship that won’t be getting any better any time soon so long as its executives insist on referring to a stock ticker that 98% of Penney’s customers wouldn’t recognize if you tattooed it on their foreheads.
 After all, did Steve Jobs walk around talk about the great things “AAPL” was creating?  Does Coke run ads saying, “Enjoy a KO Today”?  Do Wal-Mart greeters say, “Welcome to WMT” to the overburdened mothers and their screaming toddlers as they begin the hair-pulling search for the day’s bargains?
 No they do not.  But Penney executives would.
 Worse still, the company runs newspaper ads with no identification except “JCP” on the page.  And TV ads with only a “JCP” logo on the screen.  It’s no wonder the company’s sales collapsed 21% last quarter.
 But if you’re expecting ex-Apple retail genius Ron Johnson to bend a little on the “JCP” thing, well that’s not going to happen, if last Friday’s earnings call was any indication—but we’re getting ahead of ourselves. 
 The point here is to contrast Penney’s Friday morning transcript detailing its current “transformation” with last year’s presentation from another, larger department store—we’ll call it “XYZ” for now—describing its own “transformation.”
  If you can guess what company “XYZ” is, well, you just might be cynical enough to work on Wall Street.

 Who We Are
  XYZ: I think, overall, we feel good about our position in the marketplace…I would say that our transformation over the last five to seven years—I came [here] at a time when the turnaround had been complete and we identified the fact that we needed to be an attraction that people came to us for merchandise, but they also had to have an experience that was memorable.

 JCP: We are going to become an entirely new class of department store that doesn't exist today.  We are going to create a new category that we call the specialty department store and we think it is going to be profound and let me tell you about it…

Our Customer Experience
 XYZ: So we focused very much on engaging our associates and having them be the best ambassadors. I'm pleased to say that our customer service scores have been outstanding and lead recent American Express poll three years in a row, lead for department stores. I think that is a real testimonial to the effectiveness of our sales associates.

 JCP: But where we are most excited is how we are going to use RFID to transform the customer experience… So next spring we will be rolling out personal check out. So in addition to being able to check out from any employee anywhere, any time, you will be able to check out by yourself in our stores. And we think customers are going to like it and it is going to help our conversion and the customer experience.

Our Technology
XYZ:  We maintain a $650 million capital expenditure commitment this year primarily on digital infrastructure as well as remodels, two new stores, and fixture rollouts for our attractions and new initiatives…

 JCP: From a technology perspective…we have overspent on technology as a company. Part of that is because we have an extraordinarily complex and an abundant number of applications to run the business.
 Mike shared last January we have 492 unique applications, 88% of them are customized, meaning we have done all this hard work internally to make them unique to us and the challenge of that is 95% of the money we spend every year, $400 million was spent to maintain and support outdated applications, which meant we only got to spend about 5% on strategic go forward initiatives.
 If you think about that, that is $20 million a year out of $400 million going to something new to improve the customer experience or ability to manage the business and the balance going to maintain outdated legacy systems. That is a problem.

Our Promotional Policy
 XYZ: Well, our pricing and promotion is set in a year in advance, so we don't react on a week-to-week basis, but I will say that we are well priced; as I said, we're the lowest priced anchor in the mall and we compete head-to-head in the off-mall.

 JCP: In 2011 our Company ran 590 unique promotions and the average item had 20 to 30 prices -- different prices during the year. And so I figured going to three types of prices would be a lot simpler. A great everyday price, some items at a month-long better value and then clearance, which we called best price.

Our Home Business
 XYZ: We've done very well in luggage, in housewares, in the soft home side. We have a very well developed window covering business. I think one-third of all windows in the United States have [our] window coverings. That's a tremendous advantage when people are building homes and remodeling.

 JCP: And on the home thing, just so you know, there is going to be a material change in home.

Our Online Business
 XYZ: I've said many times we'd been better off if we started from scratch the dot-com than trying to change the locomotive's engine while we're running down the track. So I believe we've done a good job of understanding the issue, but it has not been easy, and has not been accretive to our monthly comps. Having said that, we've invested heavily because we believe it is a strength and that we have a history of being able to ship items to a customer's home effectively and the customer looks to us for that.

 JCP: Yes, we have not been performing well online. It is one of our big opportunities. Steve Seabolt is here in the front row. Steve took over the online store in May, we have uncovered a lot of issues -- basic issues. We don't set up our items on time. We had items in our shops that weren't set up online. Our navigation is kind of kludgy at times.

Our Cost Structure
 XYZ: Our expense program, overall, is really designed to get us to as competitive as possible of a cost structure. Our margins have been - are historically high, so we just need to make sure that our cost structure is competitive to get back to double-digit operating profit.

 JCP: Expenses -- we have talked a lot about this at $900 million. So in 2011 we had $5.1 billion of expense. Our anticipation is that number will be down by over $900 million in 2013. And where is that coming from? About $400 million of it is coming from our stores. It's about $350 million coming out of our home office and about $150 million coming out of our marketing.

Our Workforce Scheduling System
 XYZ: Our workforce utilization, our jTime - what we call jTime, which is matching schedules to when the customer is in the store, that's, again, we've taken out cost. But at the same time, our customer service scores have gone up because we have better staffing when the customers actually are in the store and save the expense when obviously there is less traffic.

 JCP: So I think in many ways our employees are so far ahead of us and they are so tired of having to go find a piece of paper to figure out when they should work…

Our Store Merchandising System
 XYZ: We have a very sophisticated process that allows us to merchandise every store differently even if they're in the same market or in the next community.

 JCP: So we will have as many distinct shopping choices in our 130,000 square feet as you will find in a 1 million square-foot mall, except you won't have to go from check out every time you leave a store, this will be a whole unique environment…

 Those readers with good memories, or long experience with JC Penney, or long experience with this virtual column, are probably already ahead of the game and know that both XYZ and JCP are one and the same: JC Penney.
 Or “JCP.”  Take your pick.  Either way, will the new JC Penney “transformation” work any better than the previous one?
 If it does, Ron Johnson really is a genius.  If it doesn’t, well, at least he tried a whole lot harder than the last crew.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at

© 2012 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...

As a 18+ year employee of jcpenney, Ron Johnson is not telling the whole story! He is doing exactly what walmart received such bad press for !! Reducing full time associates hour so they dont qualify for benefits!!
You can have all the latestest technology in the world, however if there is no one in the store to use it or assist a costumer in using it, it's for not !!! My prediction is Ron Johnson is preparing to sell the company!!

Anonymous said...

Most retailers try the same "improvements" in order to stop the bleeding and/or increase the short-term business metrics (i.e profits and share price)...The Home Depot is a perfect illustration of this and and the stock has stayed flat for the past 10 years-or-so, until fairly recently. The long-term ability for JCP to stay relevant is pretty low, similar to Sears.

Retail is a tough business...Haven't been inside a JCP in years.

Keep up the good work Jeff!

Anonymous said...

Former J C Penney employee of 30 years.

The company started changing a few decades ago and now it's in deep water with a clueless CEO at the helm. He has no idea who his customer base is or was and no idea how to draw them back in. It's a total shame to see this company die simply because a few eggheads thought they could recreate a success into their idea of a well-dressed iPad.

Anonymous said...

It could just be that they want to shorten the name, not draw attention to the stock ticker. Recall that KFC was once Kentucky Fried Chicken and MGD was once Miller Genuine Draft.

Anonymous said...

Great piece. I love retail dramas as a spectator. These CEOs are like bull riders, there is just never a shortage of guys wanting to saddle up on Bodacious. It's what they do. Investors though are not supposed to be bull riders. Why do they keep getting involved in these things?

Anonymous said...

Y'all really do need to get into JCP stores often to see what's really happening. Good things ARE developing: shops are coming alive and look super; fashion goods look sharp and represent incredible value at the retails offered. And take a look at home fashions....of the 17 beds with spreads reviewed, all but a few reflected updated fashion looks, priced right. Johnson didn't promise fast results, rather said it would take a few years. Currently, he's tweaking the promotional effort in the attempt to increase traffic. Once agin, my advice is get into the stores and walk around.....good things ARE beginning to happen.


Anonymous said...

As a petite female customer I had a hard time finding clothes in my size at the brick and mortar stores. So I was ecstatic to discover how easy it was to shop JCP on-line for clothing my size. Well mysteriously that all stopped about a year ago. Every time I went to the JCP on-line site I noticed they didn’t have the selection they use to, nor did they have my size in anything. At first I thought it was a fluke, but it now appears to be the way they’re doing business. Sales are down because Ron Johnson is a MORON and completely out of touch with the JCPenney customer let alone any potential customer. Can someone tell Ron that it doesn’t matter if you can use your iPhone to self-check out when they DON’T have the product available for the consumer to BUY…

jack said...

This is a common problem caused by some agency trying to 'calibrate' a generic message to an investor audience. It doesn't work. It's insulting. I refer you to CIT Group's advertising just before their fall; in the final analysis it comes down to a CEO who simply doesn't know the street.