Math is hard…for JC Penney

JC Penney’s CEO Ron Johnson has recently been making the rounds with various media outlets proclaiming that Penney’s will return to growth this year. They had better.

There is an old adage in retail that the best way to run a same-store sales increase THIS year is to have run a decrease LAST year.  While we are a couple of weeks away from learning the specifics of how Penney’s fared in their first year of radical transformation, it’s likely that they will be down 25% or so.

This means they will have to run a 33% same-store sales increase just to get back to where they started two years earlier.  Given that new shops are rolling out in the Spring (Joe Fresh in March, Martha Stewart and a new home concept in May) it’s difficult to imagine a major turnaround in sales growth until later in the year. Good luck getting back to even.

Another math problem is their new “semi-promotional” strategy.  While Penney’s sorely needed to re-introduce more aggressive promotions to restore traffic growth, the pricing strategy rolled out last year relied on having prices that were competitive day in and day out.  For this strategy to develop better gross margins, they would have to sell the vast majority of product at the new regular price.  Now, by layering on additional discounts, they will either run lower gross margins or need to take their regular prices up to end up in a sustainable place.  The problem with the latter approach is it means they will be uncompetitive when not on sale.  My guess is gross margin will continue to disappoint until they can fine tune this approach.

The last math problem is their recent institution of “Elsewhere Prices.”  The notion of giving consumers a comparison price is a good one.  But the fine print is the issue.  According to Penney’s most recent circular “the ‘Elsewhere’ price reflects a comparison to the price of that or a comparable item found on-line or in-store for national specialty stores during the last 90 days.”  In other words, not their most direct competitors prices. Not necessarily a price that more than a handful of consumers might actually have paid.

To be fair, lots of other retailers engage in such shenanigans. The off-price and factory outlet stores play this game all the time.  A charitable person might say that such comparisons represent a desire to be helpful for consumers.  A cynic might say that it’s closer to a con.  You can decide for yourself.

To claim truly meaningful progress in the transformation it’s not going to be enough to simply see sales growth.  To have any chance of justifying the massive investments being made, the new JCP must begin to consistently deliver out-sized same-store sales growth and evidence of progress on gross margin rates.

The math for improvement is not that hard. The math for success is pretty daunting.

3 thoughts on “Math is hard…for JC Penney

  1. The unfortunate truth for Ron Johnson, is that in order to attract the customer he really wants, Ron Johnson needs to jettison the customer he already has. In other words, if the end game is to make Penney the choice for younger, more sophisticated and digitally connected consumers, they need to cut ties with the older, coupon coveting, JCP diehard. The conundrum here is painfully obvious…. the only way to aggressively drive the numbers you call out, would be to operate the chain in such a way as to apease the very customers that have brought the company to the ruinous state that Johnson is there to rescue it from. Tough spot – even for a smart guy like Ron Johnson.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.