How it all went wrong at JCPenney

The economy is humming. Americans are eager to spend on clothes, toys and home decor.Just not at JCPe...

Posted: Aug 30, 2018 4:40 AM
Updated: Aug 30, 2018 4:40 AM

The economy is humming. Americans are eager to spend on clothes, toys and home decor.

Just not at JCPenney.

Leaderless, $4 billion in debt and with a stock price below $2, the besieged retailer faces an uncertain fate after posting its latest round of dismal earnings.

"They're in a leaky boat that eventually will sink," said Mark Cohen, the director of retail studies at the Columbia Business School and a former CEO of Sears Canada and other department stores. "The prognosis for the future is not happiness."

Penney finds itself weighed down by years of errors, failed CEOs and muddled attempts to establish a clear identity with shoppers.

Retail prowess

JCPenney has posted a profit in only two quarters over the past four years. In its most recent quarter, Penney lost $101 million and was forced to offer steep discounts to clear a glut of clothing piling up in inventory.

Penney closed 141 stores last year is closing eight more this year. It has more than 860 left, but hundreds are in troubled malls, with leases that prevent Penney from escaping.

The company's downfall does not fit cleanly into the death-by-Amazon story of many retailers in recent years. Instead, Penney's wounds are largely self-inflicted.

Its more flexible rivals have adjusted their businesses to remain relevant. Kohl's and Nordstrom have reinvented themselves with fresh brands and hipper stores. Discount retailers, such as TJX and Ross, have built loyal bases of value-focused shoppers.

But Penney has lost both customers and the faith of Wall Street.

Analysts say the company lacks the cash and focused strategy to compete against big box sellers Target and Walmart, which are battling for every inch in stores, and Amazon, which is gobbling up digital sales.

Penney is plagued by a "lack of understanding about what it is, what it stands for, and who it wants to serve," said Neil Saunders, an analyst at GlobalData Retail.

Penney's defining mistake

Penney's trouble started more than a decade ago, as sales and profit fell under CEO Myron Ullman.

It lost shoppers to cheaper sellers during the recession and struggled to bring them back as the economy began to rebound.

By the end of 2010, Penney's sales had fallen 10% from their 2006 high of about $20 billion, and the company attracted the scrutiny of activist investor Bill Ackman. Ackman and real estate investment firm Vornado bought up a chunk of Penney, forced Ullman out and installed a new leadership team.

Penney is still plagued by the decision it made next — tapping Apple's retail chief Ron Johnson as chief executive.

Johnson took over in late 2011, promising to make Penney "America's favorite store."

Instead, as New Yorker columnist James Surowiecki wrote two years later, Penney became "America's favorite cautionary tale."

Without testing shoppers' reactions first, Penney changed its advertisements, its logo, its store designs and its pricing model, all attempts to make the retailer more palatable to wealthier shoppers.

Penney ditched top private-label brands with loyal followings and introduced new ones that had little relevance to low- and middle-income customers.

"Johnson walked away from the old audience and assumed that a new one would appear instantly from out of the blue," Cohen explained.

His biggest move — ending coupons and clearance sales — backfired, alienating Penney's shoppers en masse.

Johnson declined to comment for this story.

Penney burned through cash under Johnson and got bogged down in an expensive and public legal fight with Macy's over selling Martha Stewart's kitchen line. In 2012, sales plunged $4.3 billion, a 25% fall from the previous year.

With its stock in the dumps and its balance sheet damaged, Penney ousted Johnson in mid-2013, just 17 months after he took over.

"A lot of trust between customers and JCPenney was destroyed during the Johnson era," Saunders said. "Penney ended up a much weaker company."

Stuck in mediocrity

Penney turned back to Ullman, the former CEO, for help. He slammed the brakes on Johnson's strategy, and reinstated coupons and old brands.

Although Ullman stabilized sales and stopped the stock from declining further — it had dropped from more than $140 a share in 2011 to around $20 — Penney found it difficult to dig out from its mistakes.

As rivals adopted digital strategies and invested to improve their store experiences, Penney's financial distress gave it little room to spruce up stores, buy trendy merchandise, and hire more employees.

"We are still trying to fully recover from the self-inflicted wounds of the previous strategy," Ullman said in early 2015, before he stepped down as CEO.

Although Penney is known best for selling clothes, it turned to Marvin Ellison, a former top executive at Home Depot, to lead it into the appliance business.

Ellison believed the shift would position Penney to take advantage of Sears' collapse, but customers shrugged. Washers, dryers, dishwashers, and fridges are not major traffic drivers because shoppers only buy them once in a while, and they're expensive to make.

Sales fell flat, and Penney's stock slumped further. In May, Ellison abruptly left Penney to head up Lowe's, spooking Wall Street.

Ellison also exited Penney with a fashion unit lacking direction and unsure of the type of brands it needed to offer to win over Millennials and moms. Ellison declined to comment.

Penney, which had switched its focus from older shoppers to younger, trendier ones, is now moving back toward middle-aged women, with brands like Liz Claiborne. Jeffrey Davis, the chief financial officer, said the core customer is women over 45.

"We were no longer necessarily having the broad array of merchandise silhouettes that was most important for her," he told analysts earlier this month.

What now?

To escape its debt load, Penney would need to regain a chunk of the sales volume it has lost over the years, and do it at a profit.

It is searching for a CEO to replace Ellison and focusing on women's clothing as it works to clear its inventory of brands that have gone out of fashion.

Joseph Thomas, a Penney spokesperson, pointed to same-store sales growth last quarter as proof the brand still resonates with shoppers.

The company has changed its merchandising strategy, too. It used to buy as much stuff it needed to fill up its stores, but now it's chasing proven sales trends.

"We believe JCPenney can and will be a clear winner in the retail environment," CFO Davis told analysts earlier this month.

Cohen, however, isn't counting on a comeback. He argues Penney has failed to offer shoppers the right merchandise or a defined identity, and is carrying too much inventory after years of bad purchasing choices.

"JCPenney is nowhere," he said. "A retailer who's nowhere is dead because the business is always hyper-competitive and typically a zero-sum game."

— CNNMoney's Paul R. La Monica contributed to this story.

Minnesota Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 40767

Reported Deaths: 1533
CountyConfirmedDeaths
Hennepin13054790
Ramsey5127233
Dakota257094
Stearns248119
Anoka2360111
Nobles16766
Olmsted123518
Washington122840
Mower9742
Rice8738
Scott8234
Clay60138
Kandiyohi5871
Blue Earth5442
Wright5165
Carver4421
Todd4022
Sherburne3445
Lyon3322
Freeborn3090
Watonwan2450
Steele2431
Benton2353
St. Louis21816
Nicollet19112
Martin1725
Cottonwood1380
Goodhue1388
Winona13615
Le Sueur1191
Pine1110
Crow Wing11012
Chisago1051
Otter Tail1041
McLeod990
Dodge970
Carlton890
Polk863
Unassigned8638
Isanti800
Chippewa791
Waseca750
Douglas690
Itasca6912
Murray680
Pipestone674
Meeker621
Morrison621
Faribault610
Becker570
Jackson570
Sibley572
Pennington530
Beltrami430
Brown432
Renville372
Mille Lacs362
Wabasha350
Fillmore310
Rock310
Yellow Medicine310
Houston290
Swift291
Grant240
Norman210
Redwood210
Roseau210
Wilkin213
Cass192
Big Stone170
Koochiching171
Kanabec161
Wadena160
Aitkin150
Lincoln130
Marshall120
Pope120
Clearwater100
Mahnomen101
Stevens100
Hubbard80
Lake60
Traverse60
Lac qui Parle40
Red Lake40
Kittson20
Cook10
Lake of the Woods00

Iowa Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 34080

Reported Deaths: 742
CountyConfirmedDeaths
Polk7196182
Woodbury331744
Black Hawk245759
Buena Vista173311
Johnson14058
Linn136683
Dallas136531
Marshall108019
Scott100210
Dubuque91822
Story8515
Pottawattamie80612
Wapello71431
Muscatine68544
Crawford6793
Sioux4970
Tama48229
Wright3971
Louisa36513
Plymouth3455
Webster3454
Jasper33717
Warren3111
Dickinson2953
Cerro Gordo2661
Washington2499
Hamilton1981
Boone1641
Clay1481
Clarke1433
Allamakee1384
Clinton1301
Shelby1200
Mahaska11917
Carroll1101
Poweshiek1108
Bremer1067
Pocahontas1061
Franklin1040
Des Moines1002
Emmet950
Cedar941
Henry933
Hardin890
Cherokee821
Taylor810
Monona780
Marion770
Floyd762
Benton741
Guthrie734
Jones690
Osceola660
Sac650
Butler642
Buchanan621
Jefferson620
Calhoun612
Iowa611
Humboldt591
Hancock581
Harrison580
Delaware561
Fayette560
Jackson560
Lee542
Madison532
Monroe517
Lyon500
Clayton483
Palo Alto480
Grundy470
Mills470
Winneshiek450
Mitchell440
Davis421
Kossuth410
Union380
Howard370
Lucas344
Winnebago330
Greene300
Chickasaw290
Cass270
Unassigned270
Ida230
Keokuk231
Worth220
Appanoose213
Van Buren210
Page200
Adair170
Audubon161
Ringgold151
Decatur130
Montgomery112
Wayne110
Fremont100
Adams80
Rochester
Broken Clouds
68° wxIcon
Hi: 79° Lo: 60°
Feels Like: 68°
Mason City
Clear
75° wxIcon
Hi: 82° Lo: 62°
Feels Like: 75°
Albert Lea
Clear
73° wxIcon
Hi: 78° Lo: 61°
Feels Like: 73°
Austin
Broken Clouds
72° wxIcon
Hi: 79° Lo: 61°
Feels Like: 72°
Charles City
Few Clouds
72° wxIcon
Hi: 83° Lo: 62°
Feels Like: 72°
Cooler air finally filtering in, rain chance returns Saturday
KIMT Radar
KIMT Eye in the sky

Latest Video

Image

Connecting with a loved one with dementia during the pandemic

Image

Bruins set to host all-star game

Image

COVID-19 Cases Expected to Spike in North Iowa

Image

Training hard for a season that might not happen

Image

Sean's 6pm Weather 7/10

Image

Sweet Corn season kickoff

Image

Getting caught in the act

Image

Forum tomorrow: educating young voters

Image

Donation to Channel One Food Bank

Image

Concern over spread of COVID-19 downtown

Community Events