J.C. Penney (JCP) shares tumbled Wednesday after the retailer reported a much wider-than-expected first-quarter loss, suspended its dividend and saw weakness across all core metrics.
In an apparent rebuke to new CEO Ron Johnson's strategy to change the company's focus from discounts to everyday low prices, total sales fell 20% while same-store sales declined 19% and gross margins fell to 37.6% from 40.5% as foot traffic in the stores dropped 10%.
"Our marketing isn't doing the work," Johnson said in a conference call. "We've got to get our pricing across. Coupons were a drug, they really drove traffic. [Customers] need to understand the value we're offering."
But it's Johnson, not J.C. Penney's customers, who has a problem understanding what the retailer needs, says Howard Davidowitz, a veteran retail banker and CEO of Davidowitz & Associates.
"He's caused incalculable damage," Davidowitz says of Johnson, who joined J.C. Penney last year after running Apple's (AAPL) retail operations. "The customers are everything. They don't know what the hell he's doing."
In a nutshell, Johnson wanted to wean customers off one-time discounts -- notably coupons -- and get them to look at J.C. Penney as a place for everyday low prices. (See: J.C. Penney CEO: We Can Become America's Favorite Store)
But that's "a very tricky thing to get customers to believe," Davidowitz says. "What is a 'fair' price? Who's to determine it?"
Using Target's (TGT) multi-year rollout of groceries as an example, Davidowitz says "experiments" are good in retail but need to be done on a test basis and introduced slowly to get customers comfortable with a new concept.
"J.C. Penney didn't need a revolution, it needed an evolution," he says. "You can't take an old line company that's been operating the same way a very long time and throw everything out the window and say 'now we've reinvented the company.'"
Davidowitz does have a flair for the dramatic, as you can see in the accompanying video. But he was also one of the few who didn't buy into the hype last year when Johnson was named J.C. Penney's CEO, as you can see here.
After calling J.C. Penney shares a short last June, Davidowitz remains glum about the company's prospects following its dismal quarter, predicting the company will now slash inventories -- limiting customer choice -- cut staff and eliminate all promotions.
In other words, Davidowitz says J.C. Penney is going down the same path as Sears Holdings (SHLD), another retailer that has fallen on hard times. As with Eddie Lampert at Sears, J.C. Penney has come under the influence of financial heavyweights, hedge fund manager Bill Ackman and Vornado Realty Trust's Steven Roth.
Lampert, Ackman and Roth are all incredibly accomplished investors and brilliant by all accounts. But the early returns at J.C. Penney suggest once again that being a great investor does not necessarily make for a great retailer.
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