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One Thing Missing in J.C. Penney Turnaround Plan

Dee Gill

Who, exactly, is J.C. Penney (JCP) talking to in those heart-felt ads, the ones where the company apologizes for changing its stores and begs shoppers for a second chance? Is it women who supposedly loved squeezing through rack-after-ransacked-rack of discount blouses in the tag-sale dump sites J.C. Penney sales floors had become? Is it former customers who were offended by the Apple guy’s refusal to take $10 off a $25 purchase with a newspaper coupon? Because we already know there are not enough of any of those people to sustain J.C. Penney.

Who is J.C. Penney’s target customer? J.C. Penney doesn’t know. And until the company can answer this basic question, long-term investors can tune out any improvements the company reports as post-Ron Johnson progress. A clear understanding of the ideal customer, as any freshman business student knows, is the most basic requirement for competing well in any market.

Does J.C. Penney want to attract very budget conscious working women, the ones who need office-worthy slacks and blouses at the cheapest price possible? That seems a sensible market for a company accustomed to very visible discounting and inexpensive merchandise. But discounting success requires management with a keen understanding of how much a customer will pay for what. In the best discounters, this understanding is reflected in relatively steady, albeit thin, profit margins like those seen at Wal-Mart Stores (WMT) and Target Stores (TGT). J.C. Penney, as we can see by the chart below, lost its grasp on this long before Johnson took over in November 2011.

JCP Operating Margin TTM Chart

Perhaps J.C. Penney will aim at a little bigger wallet, like those carried into TJX Cos. (TJX) like and Ross Stores (ROST). Or even a higher middle income customer who shopped the less expensive designer brands inside Macy’s (NYSE:M) department stores at the other end of the mall. Even before Johnson, J.C. Penney was pursuing this crowd by building Sephora cosmetic shops within its stores. They were islands of light and trendiness inside discount bazaars before Johnson came in and expanded on the premise. He cleared out more floor space for less but more youthful merchandise and added Levi’s and Martha Stewart boutiques, for starters. But clearly, neither management team at Penney’s knew how to reach this less budget-conscious market. Sales at those competitors have gone up while Penney’s have gone down.

JCP Revenue TTM Chart

Johnson, as we all know by now, made Penney’s bad situation horribly worse before departing April 6. Just how much worse became apparent on Tuesday when the company offered preliminary first quarter results: a 16.6% fall in same stores and revenue of $2.64 billion. That’s down from $3.15 billion a year earlier and about $10 million below analyst forecasts. But the company has recently gained backing from George Soros and new debt to avert a liquidity crisis, and the shares are up nearly 10%. Even a return to the bad old days, before Johnson’s tenure took the share price down some 50%, probably looks good to a lot of investors now. Johnson’s time was so bad that it’s easy to forget that sales and profits were in serious trouble even before he got there.

JCP Revenue TTM Chart

Before sinking more money into JCP, however, it’s worth asking who, precisely, the company has in mind with the voiceover “We’d love to see you.” Of course, they’d love to see any shopper right now. Long term, however, the company needs loyal shoppers that can afford it a decent profit. J.C. Penney looks no closer to finding or understanding this shopper than it was two years ago. Firing Johnson hasn’t solved this fundamental problem at all.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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