Penney overhauls pricing, stores in major makeover

NEW YORK Wed Jan 25, 2012 6:57pm EST

The sign outside the J.C. Penney store is seen in Westminster, Colorado May 16, 2011. REUTERS/Rick Wilking

The sign outside the J.C. Penney store is seen in Westminster, Colorado May 16, 2011.

Credit: Reuters/Rick Wilking

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NEW YORK (Reuters) - J.C. Penney Co Inc (JCP.N) is changing everything from its pricing strategy and store layout to its exclusive merchandise lines as the department store chain seeks to jettison the wide margin-sapping discounts that failed to bring in customers.

The physical revamp and pricing plan were the first strategic salvos from Chief Executive Ron Johnson, who was hired away from Apple Inc (AAPL.O) in November, after building that company's retail chain.

Investors were uncertain about the planned changes, sending Penney's shares as much as 3.4 percent lower before they closed at $34.20, down 1.2 percent on the day.

Penney has lost ground in recent years to rivals Macy's Inc (M.N) and Kohl's Corp (KSS.N), and lags them by a large margin in sales per square foot. Penney has been hurt by a reliance on price-cutting that never translated into consistent sales gains.

Starting next week, Penney will begin to do away with the deep discounts that are synonymous with its name, in favor of offering shoppers simpler, more predictable pricing.

Johnson said new pricing can work only if it comes with new product and new presentation. He recognized there was a risk of confusing shoppers used to Penney's deep discounts.

"There will clearly be a learning period for the customer," Johnson told Reuters in an interview.

Beginning in August, the retailer plans to carve each of its stores into about 100 sleek, neat sections featuring specific brands or product categories, Penney's executives said on Wednesday. It will start adding two separate shops per month at each store.

Penney's 1,100 U.S. stores will bring in brands including home goods icon Martha Stewart and fashion designer Nanette Lepore. More exclusives are coming. The retailer has already had success with its Sephora cosmetics boutiques, as well as its MNG by Mango fashion stores.

Penney President Michael Francis said the retailer would shed a few underperforming brands but did not elaborate. He also said brands including St. John's Bay will get their own boutiques.

The new strategy comes as rivals are moving in the same direction. Macy's is creating upscale boutiques at its flagship, while Target Corp (TGT.N), where Johnson was a merchant for 15 years before joining Apple, two weeks ago said it would host small shops in stores with trendy brands.

Penney will spend $80 million a month on an advertising campaign to inform shoppers of the changes. The campaign will be heavily focused on television and will feature comedian Ellen DeGeneres.

The retailer is also doing away with circulars in favor of a monthly booklet highlighting that month's specials, printed on high-quality paper similar to a J. Crew catalog.

The 110-year-old department store chain plans to announce financial details of the overhaul, which will take until 2015 to complete, on Thursday.

KEEPING SOME DISCOUNTS

Some 72 percent of Penney's $17.8 billion revenue last year came from items discounted at least 50 percent. Johnson said Penney's reliance on discounts may have gotten out of hand. "At some point, you seem desperate," he said.

Discounts will remain at Penney, but in a different form.

Every first and third Friday of the month it will clear out some merchandise by putting blue tags on certain items. The old practice, by contrast, was to throw items into a discount bin with signs proclaiming "70 percent off."

Johnson told a news conference on Wednesday that in the past 10 years, discounts have risen to 60 percent off on average from 38 percent, while the average amount of money that ends up in Penney's cash registers has fallen.

"The customer knows the right price," Johnson said. "To think you can fool a customer is kind of crazy."

Wall Street is waiting to see if Johnson can replicate the success he enjoyed at Apple.

Goldman Sachs said it expects Thursday's presentation to be "more sobering" than Wednesday's news conference, as the company will likely give conservative financial guidance. The turnaround may already be priced in to Penney shares, which trade at a higher valuation than its peers, it added.

Paying close attention to the new strategy is Penney board member William Ackman, whose Pershing Square Capital Management is the department store's biggest shareholder. Pershing Square holds 18.1 percent of Penney's shares and, under a deal with the company, can own as much as 26.1 percent.

There were some early signs that customers liked the new pricing as it showed up in some test-market stores.

Tricia Lewis, 44, a fashion blogger from Queens, New York, was shopping at a Penney store in Manhattan on Wednesday and noticed a pair of "I heart Ronson" leggings for $10.

"That's a really fair price on leggings. Now, I wouldn't wait for it to go on sale," Lewis said.

Some Wall Street analysts have called for Penney to close some of its stores, but Johnson dismissed that notion.

"If we're going to be America's favorite store, we need to work in small towns, big cities and suburbs," he said.

(Reporting By Phil Wahba and Dhanya Skariachan in New York, additional reporting by Doris Frankel in Chicago. Writing by Jessica Wohl in Chicago. Editing by Derek Caney, Gunna Dickson and Matthew Lewis)

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Comments (4)
mike12357 wrote:
This is hilarious. Take a guy whose success came from running a place that was the only place you could buy (Apple) products that everyone wanted, and put him in a floundering retail place whose products you can buy anywhere else (for much cheaper prices). Take away any sales and discounts. Mark clearance items with a blue tag. Parse the staff of all but part-time minimum wage earners, who really don’t want to be there. It looks like Ron is the man with the plan… Good luck with that.

Jan 25, 2012 4:07pm EST  --  Report as abuse
PeteOliva wrote:
Hmmm. I like the concepts mentioned but I think slashing discounts is only going to hurt things in this economy. The customer does know the right price, and it’s usually the lowest one.

Jan 25, 2012 8:18pm EST  --  Report as abuse
vbchick48 wrote:
This is all well and fine…glad your concerned about your customers, but how about telling your employees what the heck is going on so they know if they have a job or not. Take care of them first and they will take care of you.

Jan 26, 2012 10:04am EST  --  Report as abuse
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