By Phil Wahba
(Reuters) - First the good news for J.C. Penney Co Inc (JCP): online sales rose 26.3 percent during the holiday quarter.
Now the bad: the surge mostly reflects how far the one-time e-commerce pioneer has fallen.
The U.S. department store chain started offering e-commerce in 1995, long before most large retailers, the benefit of also operating a big catalog business until 2011.
But after reaching $1.52 billion in 2011, online sales fell by about a third in 2012, while rising 41 percent at the likes of Kohl's Corp (KSS.N) and Macy's Inc (NYS:M). Penney lost its lead because of management missteps and inadequate investment in the website and other technology.
"Sadly they've gone from being a leader to a laggard," Lauren Freedman, president of the e-tailing group, a consulting firm, said about Penney. "They've failed to keep up."
Penney now gets some 8 percent of sales online, compared with 15 percent, including catalog sales, a decade ago. E-commerce sales at Macy's Inc (NYS:M) and Penney were about equal in 2010. Two years later, Macy's were three times larger.
On-line sales started improving last summer after Chief Executive Myron Ullman returned to the company and brought back merchandise that had been discontinued even though it was popular with online shoppers, and began to integrate buying and planning teams for both e-commerce and stores to support what retailers call "omnichannel" shopping.
But a lot of work remains to be done.
"As one of the pioneers in online retailing, we are striving toward taking omnichannel to the next level at JCPenney - but first we knew we had to fix jcp.com," said a spokeswoman, who acknowledged that the decline was partly "self-inflicted."
Penney, which plans to close 33 of its 1,100 stores by May, must also improve its online business to makeup for a drop in store visits. The National Retail Federation estimates that overall U.S. e-commerce sales will grow by as much as 12 percent in 2014, three times faster than in-store sales.
Penney is likely to provide an update on its e-commerce when it reports quarterly earnings on Wednesday afternoon. The retailer remains cash-tight after overall sales fell about 31 percent in two years to an estimated $12 billion, and the stock plunged 75 percent from a 52-week high on February 25 2013.
Penney's web problems were long in the making.
Around 2007, to ensure more consistency between Penney's e-commerce and stores, Ullman folded the jcp.com unit, which had functioned almost autonomously, into the retail business.
That change had unintended consequences: store buyers dropped items such as baby furniture and big and tall men's clothing that were popular online but not in stores, and Penney's annual web sales stagnated at around $1.5 billion between 2007 and 2011, while rivals grew.
Online sales went into freefall in 2012 when former CEO Ron Johnson came on board and neglected e-commerce to focus on hip new brands and store remodeling to take Penney up-market, an effort that failed. The product selection in-store and online became disjointed and confused shoppers, and popular items were dropped.
Johnson's vision for home goods, which account for half of online sales, flopped, and Penney is still trying to fix that business.
Adding to the problems, during Johnson's short reign, more jcp.com experts left, disappointed that the Apple Inc veteran was not more interested in ecommerce.
Ullman, who lead the company between 2004 and 2011, returned in April 2013 and brought back a team that studies customer behavior online. This month, he hired former Saks Inc Chief Information Officer Michael Rodgers to oversee the closer integration of stores and e-commerce, and to rebuild online customer loyalty programs, one of his areas of expertise.
Penney company isn't starting from scratch.
The computer systems that support its website, and integrate it with company-wide inventory management, are largely up to date, following a multi-year investment between 2008 and 2011, so Penney likely won't need to spend a fortune on new systems.
It also has the warehouse facilities it needs, and its flawed website remains one of the most visited e-commerce sites.
Still, jcp.com lacks basic features such as lists of top-selling or top-rated items, and has poor customer service ratings, said the e-tailing group's Freedman.
Penney's website scored a 68 out of a potential 100, in the firm's annual survey, compared with 72.3 for department stores and 78 at Macy's and 73.5 for Nordstrom.
Analysts said Penney needs a big improvement in web sales to get back on track, given how slowly its overall sales are recovering. Comparable sales rose 2.2 percent last quarter.
"I don't see how you survive without it," said Ken Murphy, senior vice president and portfolio manager at Standard Life Investments.
(Reporting by Phil Wahba in New York; Editing by Jilian Mincer and Frank McGurty)