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Penney's pricing strategy takes a toll on sales

Anne d'Innocenzio, AP Retail Writer

NEW YORK (AP) -- Two months after launching a bold new pricing strategy, led by its new CEO, J.C. Penney is taking a big hit in revenue, but a top industry analyst says the department store chain should stay the course because the new tactic is likely to resonate with its customers.

Penney has cut back on hundreds of promotions in favor of a three-tier strategy that's more predictable. It's offering what it calls "everyday" prices that are 40 percent lower than what Penney was charging a year ago; month-long sales on select items and clearance events during the first and third Friday of each month.

Citi retail analyst Deborah Weinswig predicted in a note published Friday that Penney's revenue will drop 7 percent this fiscal year as shoppers accustomed to seeing big discounts go to rivals like Macy's Inc. That's worse than the drop of almost 2 percent drop she earlier forecast. She also expects revenue at stores open at least a year to drop 9 percent, more than the 4 percent she originally anticipated.

But Weinswig expects Penney's new strategy to eliminate unprofitable promotions and improve its profit margins overall. Penney customers interviewed by Citi liked the new pricing, though two-thirds weren't aware of it, she said. Once they learned about the strategy, 26 percent said they would shop Penney's more often, and 8 percent said they planned to shop there less, she said.

"We believe our findings demonstrate that the strategies announced to transform (Penney's) business are the right actions to take and will resonate well with consumers over time," Weinswig wrote.

The pricing plan was the first major move by Ron Johnson, a former Apple Inc. executive who became Penney's CEO in November. It's part of a general plan to overhaul everything from Penney's brands to the store experience, including carving each store into 80 to 100 smaller brand shops. The company also plans to add "Town Squares," where customers can get advice and other services, much as they can at Apple's Genius Bars.

In an industry where the bargain is king, what's raising the most eyebrows is Johnson's plan to do away with most promotions. Americans came to expect discounts in the recession so the move is risky as it could turn off shoppers.

"If successful, this will be a major change in retailing because suddenly the promotional activity will decrease and other retailers will also have to find ways to attract customers," said New York-based retail consultant Walter Loeb. "But this is going to take time."

Loeb said business seems to have fallen "precipitously" since the strategy was implemented. He says traffic has been weak during at least a dozen visits he's made to Penney in recent weeks.

Weinswig expects total sales to decline to $16.06 billion for the fiscal year that started in late January, down from $17.26 billion the year before, and she lowered her earnings estimate to $1.75 per share from $2.16 per share because of restructuring charges tied to transformation.

Analysts expect earnings of $1.78 per share and revenue of $16.66 billion, according to FactSet.

For the fiscal year ended on Jan. 28, Penney reported a loss of $152 million, compared with net income of $389 million the year before on slightly higher revenue. Revenue at stores open at least a year rose a slim 0.2 percent in the latest fiscal year, compared with a 5.3 percent increase for Macy's.

Penney's officials have been guarded about how the changes are affecting the business so far. The company is expected to offer more details when it reports its quarterly earnings results in May.

The company's shares fell 25 cents on Friday to close at $35.43.