JC Penney: Better isn’t the same as good

I bought some JC Penney shares on Thursday in advance of their earnings announcement.

I almost never buy individual stocks, but this was an easy decision. Penney’s execution has improved dramatically since Ron Johnson’s departure. Two major competitors–Sears and Kohl’s–are flailing. The year-over-year comparison is absurdly easy. Inventory seems to be tightly managed, which virtually guarantees a solid lift in gross margin. But mostly importantly, negative Wall Street sentiment has been fueled by much fundamental misunderstanding–as evidenced by the large amount of short interest.

My hunch was right. Penney’s reported better than expected performance. And the stock has popped some 15%.

Yet I am keenly aware that better is not the same as good. Penney’s has a huge amount of work to do just to get back to the performance level of the pre-Johnson era which, frankly, was solidly mediocre. The moderate department store sector has basically become a zero sum game where top-line growth must come from stealing share from the competition. And competition is, and will remain, intense.

I am, however, optimistic about the immediate-term. The self-inflicted wounds of the Johnson era are gone. Marketing and merchandising are moving in the right direction. Appropriate attention is now being placed on e-commerce and omni-channel capabilities. As Sears sinks into oblivion, JCP is poised to gain market share and leverage their real estate position. Mike Ullman’s back-to-basics strategy is appropriately conservative and should result in steadily improving gross margins.

It’s also important to note that a year ago Penney’s had done virtually everything one could think of to chase customers away. Importantly, a significant percentage of their stores were off-line in preparation for the home re-launch. Gross margins were getting pummeled by clearance markdowns. Lastly, retail remains a relatively high fixed cost business. As sales improve (both in-store and on-line) Penney’s will start to see tremendous operating leverage.

So for me, better is a virtual certainty for Penney’s–at least for the next few quarters. And those who see the brand at the brink and in need of massive store closings are going to be disappointed (and, as an aside, they also fail to understand the importance of physical stores in driving the online business and overall omni-channel strategy).

Better is easy.

Good? That’s a whole different question.

Yes, But You’re Still Ugly . . .

Once upon a time there was a man and a woman who had known each other for several months.  Over time, the man had grown quite fond of the woman and one day he finally got up the nerve to ask her out.  “I’m sorry” she told him, “you seem like a very nice guy, but I just don’t find you physically very attractive.”

The man was disheartened at first, but soon he was energized by the rejection. The very next day he started hitting the gym, and that weekend he got a new haircut at the most expensive salon in town.  Over the next several weeks he continued his workout regimen and spent a fair amount of his paycheck to update his wardrobe.  He even went to get a manicure and facial.

After about a month of his self-improvement plan, he went to the woman and asked her out again.  “I’m sorry” she once again told him, “I can see that you’ve really taken steps to improve your appearance, but there is still just not enough of a physical attraction for me to decide to go out with you.”

While one can certainly challenge the shallowness of this woman’s decision-making process, we can certainly see how businesses, finding themselves in the same situation as the hapless gentleman of this story, adopt the same line of thinking as they seek to improve themselves.

When I was at Sears nearly ten years ago, we had a new senior executive who spent hours and hours digesting the mounds of consumer research that laid bare the challenges we faced in regaining our competitive position.  He was struck by the analysis the showed how our target consumers rated us on important dimensions versus tough competitors like Kohl’s and JC Penney.   “I now see exactly what we need to do” he told us dramatically at an early morning strategy session.  “If we can just focus on closing these gaps, we can really make some progress.”

As I left the meeting–with strong visions of needing to update my resume dancing in my head–one of my direct reports turned to me and said quite sarcastically, albeit accurately: “great, our new strategy is to suck less.”

Better is not necessarily good.  Simply getting closer to what the customer truly values doesn’t engender loyalty and brand evangelism.  “New and improved” does not guarantee a win.

So are you going to be spend your time and resources merely closing the gap with your competition?  Or are you going to innovate, take a risk and leapfrog the pack to do something truly remarkable and-dare I say-beautiful?

Defying the Sea of Sameness

Any business school course on strategy will devote significant time to the importance of competitive differentiation.  We attend marketing conferences where speakers pontificate on the need to have a unique value proposition.  Excellent books like Seth Godin’s Purple Cow preach the benefits of being remarkable to separate yourself from the herd.

Yet any visit to the mall or surfing of the internet quickly reveals an often numbing “sea of sameness.”

This has long been true for many retailers.  But I believe the recession has made it worse.  As retailers have slashed inventory, desperate to demonstrate inventory productivity progress to investors, merchandise assortments have become less interesting, less differentiated, decidedly less remarkable.

By now it should be apparent that a full recovery is going to be slow in coming.  That means revenue growth must come primarily from stealing market share.

Now is the time to go on the offensive.  Now is the time to commit to deeply understanding your target customers’ needs, compromises and preferences and to find ways to innovate, to be truly remarkable.

For some companies, this means embracing the trusted agent role, going out into the market and curating a unique offering for a discerning clientele.  This is what the best specialty boutiques do.

For others, it means finding more exclusive products in the market, leveraging existing vendor relationships to construct a unique offering and/or developing their own compelling private brands.  This is happening across the price spectrum.  Kohl’s recently reported that 47% of revenues now come from exclusive products.  Saks Fifth Avenue is aggressively working to significantly increase its percentage of private label and national brand exclusives to differentiate itself in a challenging luxury market.

I think two basic principles are at work here.  First, a willingness to move away from a product-centric, gross margin rate maximization mind-set to embrace customer-centricity and all that entails.  Second, an acceptance that it is actually more risky to play it safe and swim in the sea of sameness.

Someone in your industry will decide to break away from the herd and gobble up share while the competition is on their heels.  What’s your choice?