JC Penney sinks to all-time low despite omni-channel claims of success

Profile picture for user slauchlan By Stuart Lauchlan August 13, 2017
Summary:
JC Penney's articulated a strong omni-channel argument, but Wall Street's not convinced, sending the stock price to a new low.

JC Penney bag
Over the past couple of years, JC Penney CEO Marvin Ellison has engaged on a high-profile turnaround initiative for the US retailer, built around refocusing the firm on an omni-channel business model. It’s a journey that was always going to take time to deliver and would involve some tough decisions about closing offline stores.

The trouble for JC Penney is that time appears to be running out, despite Ellison’s protestations that digital channels are beginning to prove their worth.  Late last week , on the back of another bad quarter, the company’s stock price fell to an all-time low of less than $4 a share and a market capitalization of around $1 billion, a far cry from the $30 billlon enjoyed in the 1990s.

The fall in the share price came at the end of a bad few days for the US retail sector, with both Macy’s and Nordstrom reporting their own woes. But JC Penney’s decline was the starkest, leaving Ellison to justify the shifting strategic focus for the chain that was once the retail darling of Middle America.

Ellison has been an articulate advocate of omni-channel thinking over the years, but now finds himself having to explain to skeptical investors what the changed role of the offline store needs to become, against a backdrop of closing hundreds of outlets this year. It’s all part of a planned process, he insists:

Closing 138 stores was a very difficult decision, but we feel it was the right thing to do for our business. This decision will allow us to improve working capital, generate more cash flow and invest capital in our more productive locations. And although it's early, thus far, we've experienced no negative impact to our dot-com sales or traffic in the ZIP codes where we've closed stores. This reinforces that the omni-channel strategy is working, and we'll continue to focus on serving customers the way they desire to shop.

 We have great data analytics…that really gives us really real-time visibility. So that's the first sign that maybe our retained customer strategy is working, and the omni-channel will be critically important to make that work.

Among the critical elements of the omni-channel program is the introduction of BOPUS  (Buy Online, Pick Up in-Store) same-day initiative capabilities, getting customers to order online and then get them into a physical store to complete the transaction. Ellison says:

Today, approximately 80% of the stores' existing inventory is eligible for free same-day pickup. This is a tremendous milestone given that we introduced this feature just one year ago in July with a limited number of SKUs eligible when we launched. As we now drive more online customers into the store, we'll continue to minimize our last-mile delivery costs and drive meaningful traffic to our stores.

In fact, in-store order pick-up drives over 600,000 customer visits to our stores each week. There's very little argument that the future of retailing is omni-channel. In other words, with last-mile fulfillment and customer acquisition costs increasing and the customers demanding speed and value, the retailer who can most effectively combine physical stores, e-commerce, and simplicity will be the winner.

We recently announced that all online orders will ship free to our stores with no minimum threshold required. We are confident that this new strategy will drive incremental customer footsteps to our stores. We are well on our way to creating a best-in-class omni-channel business here at JC Penney.

Product focus

There’s also an push around specific product areas that, by their very nature, drive customers in-store, most notably beauty and electronic household appliances. A prime example of the former is JC Penney’s ongoing partnership with Sephora, says Ellison:

During the [latest] quarter we opened a total of 32 new Sephora locations and we also recently completed 31 Sephora expansions allowing us to deliver an enhanced product offering and experience in most of our productive Sephora locations in the company.

We're the only retailer that can offer the combination of Sephora, salon and fine jewelry under the same roof, and at JC Penney, we're creating a unique beauty experience that cannot be replicated online and one that brings theater and excitement to our physical stores.

And once those Sephora customers are through the doors, they carry considerable potential value:

Our salon customers shop the stores twice as often per year as our non-salon customers. 

It’s the same story around household appliances, where customers are likely to be purchasing at a higher price point. Ellison says:

What's unique about JC Penney is that we have a customer that really operates in a household income of roughly $80,000 and below. So when you make an appliance purchase, a couple of thousand dollars, you want to come into the store, physically touch it, see it and you want to get some level of consultation from the associate.

So although e-commerce is a great platform for us from the appliance perspective, it is tied to the physical store and the associates' product knowledge in the store. So although, we look at every competitive pressure point, brick-and-mortar and online, we don't see anything happening in the marketplace that gives us any pause because this is net new business for us. 

My take

While you have to give Ellison credit for his optimistic reading of the state of the firm’s fortunes, the harsh reality is that the share price is down 43% since the start of the year, indicative that Wall Street’s wider lack of enthusiasm for the ‘legacy’ retail sector is particularly acute when it comes to JC Penney.