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JC Penney Shares Plummet on Poor Quarterly Sales

JC Penney Store

by John Sealander  

Who Determines the Future for JC Penney:
Ron Johnson, or His Customers?

JC PenneyRon Johnson, the former Target executive who helped Steve Jobs create Apple’s wildly successful chain of retail stores, was recruited by activist investor Bill Ackerman in November of 2011 to apply his retail magic to ailing retailer JC Penney. Johnson told investors in January of 2012 that the transformation would take four years. Although corporate turnarounds are always difficult, Ron Johnson is not off to a good start. During the first year of his tenure, JC Penney stock has already declined by more than 60%.

Since his appointment as CEO, Johnson has delivered one disastrous quarter after another. According to Reuters, JC Penney shares dropped as much as 22% in a single day after the retailer announced a 31.7% decline in comparable sales during the important 2012 Winter holiday quarter. This dismal quarterly report follows a long series of similar earnings reports since Johnson began his transformation plan.

Ron Johnson’s Failed Attempt to Transform JCP

Forbes market analyst Steve Schaefer suggests that Ron Johnson’s biggest mistake have been putting too much faith in the rationality of the American consumer. “By eliminating sales, coupons and promotions,” says Schaefer, “Johnson figured the chain could offer competitive, everyday low prices, but he also eliminated the thrill of the chase.” JC Penney customers were not like Apple customers. They were very sensitive to pricing issues and loved the opportunity to buy something at 50% off.

Instead of trying to transform the store, many now think that Ron Johnson made the mistake of trying to transform his customers instead. Johnson was convinced that replacing popular sales events with “everyday low prices” while simultaneously rolling out dozens of branded boutiques within the store for “hip brands” would reverse JC Penney’s declining sales figures. Customers didn’t agree. Now, even staunch Johnson supporter Bill Ackerman concedes that removing the “anchor price” at JC Penney stores was a mistake. “Consumers don’t just know the right value,” says Ackerman. Many analysts now think that customers depended on sales and coupons to provide perceived value.

Although attempting to transform the modern retail environment may be a noble endeavor, it is one that investors seldom have patience for. Johnson may no longer have the time to complete his four-year transformation initiative. S&P has already cut JC Penney’s credit rating and the company is burning through cash reserves at an alarming rate. With JC Penney bonds falling to a record low after this quarter’s dismal earnings report, Bernie Sosnick, an analyst at Gilford Securities, said recently in a telephone interview “You’re getting down to a point where Penney cannot absorb many more significant losses without the damage becoming irreparable.”

The Power of the Consumer

According to watch industry insider and owner of Gevril Group owner Samuel Friedmann, the recent demise of JC Penney has many lessons for the watch industry. “You should never try to second guess your customer,” says Friedmann. “The customer is always right, and it is our job to listen to them and meet their needs.”

Does Ron Johnson still have time to learn this valuable lesson? The clock is already ticking and many think we’ll know the answer by the end of this year. Key investor Bill Ackman, whose hedge fund Pershing Square Capital Management currently owns 17.9% of JC Penney, has already said, “We won’t continue to pour billions into a strategy that’s not working.”

Johnson threw out the playbook when he eliminated cashiers at Apple stores and replaced them with geniuses, specialists, even a concierge. Maybe that’s not the answer for JC Penney however. In a year where Penney saw same-store sales drop by more than 25%, rival Macy’s actually enjoyed a 3.7% increase. This is strong evidence that sales and coupons may be here to stay.

About Gevril Group

Gevril GroupGevril Group is the exclusive US representative for select European watch brands, distributing and servicing luxury, fashion and sports timepieces at a wide range of price points. Gevril Group also operates a full-service watch repair department staffed by master Swiss watchmakers.

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