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JC Penney : brand profile

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JC Penney is one of America's best-known general retail groups, specialising in clothing, accessories and home furnishings, but it has struggled for several years to reignite performance. The company first began to lose sales and market share in the 1990s as customers moved away to less traditional outlets, especially discounters such as Walmart. Penney's fought back with a marketing campaign designed to show that its department stores offer casual as well as conservative fashion at affordable prices. But the company also had to close several stores, and restructure others in order to regain profitability. Financial performance improved significantly between 2004 and 2007, before hitting a brick wall at the end of the decade as a result of the recession. Despite its best efforts to-date, Penney's has found it hard to shake off perceptions that it is a tired and slightly dowdy brand. A new management team launched an ambitious overhaul of JCP's strategy in 2012, but not only did the long-expected turnaround fail to materialise but in fact performance significantly worsened, leading to another management overhaul a year later. It is still searching for a lasting fix.

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Brands & Activities

JC Penney has struggled to transform its public image in the face of fierce competition not only from discounters Walmart and Target, but also rival department store operators such as Macy's and Sears. It has been a slow, often painful process. A new management team headed by former Apple Stores boss Ron Johnson launched a new promotional strategy for JCP in January 2012, but that approach proved disastrous and was abandoned a year later in favour of the old-style discounting and couponing that Johnson had vowed to sweep aside.

JC Penney has traditionally set out to be the preferred shopping choice for Middle America, and a place where, to quote its current marketing slogan, customers can "get their Penney's worth". As of Jan 2017, the group operated 1,013 department stores outlets throughout the US, having closed around 80 stores over the previous three years. A month later it announced plans to close a further 140 stores during 2017 and 2018. It specialises in clothing and accessories and also selling a selection of home furnishings. Though in all other respects it has long had a blanket coverage of the nation, Penney's first store in Manhattan didn't open until 2009.

The group has a substantial portfolio of private label clothing and home furnishing brands which together contribute just under half of total revenues. They are led by "power brands" including Arizona Jeans and St John's Bay casual clothing, Decree for teens and young adults, Okie Dokie for kids, Worthington and Stafford career clothing for women and men respectively, Ana casual clothing and Ambrielle lingerie for women, JF casual and work clothing for younger men. Home furnishings are marketed under the Cooks, Linden Street and Studio brands. In 2010, the group became the exclusive stockist for all apparel under the classic Liz Claiborne label, and acquired full ownership of the brand, as well as jewellery sideline Monet the following year for $288m. Former football star Michael Strahan, now a top TV host, also has his own menswear line at the chain.

There are many more private label or exclusive brands. Penney has exclusive US department store rights to MNG by Mango from Spain and Aldo's Call It Spring footwear. A long partnership with the Joe Fresh range produced by Canadian retailer Loblaw ended in 2015. Another exclusive range, the premium apparel and lifestyle range designed by Ralph Lauren under the American Living label, was shuttered in 2012 after five years. Several of these exclusive and private label brands are sold through self-contained "shops" located within Penney stores. In 2006, the group agreed a deal with LVMH to open self-contained outlets for beauty retailer Sephora in selected stores. By early 2017 there were almost 580 such concessions, with more due to open. There are similar arrangements in place for Levi's and Izod menswear. Penney opened a line of Disney children's boutiques instore from 3Q 2013, selling toys and apparel.

For 2016, JC Penney said that women's apparel accounted for 24% of sales, women's accessories and Sephora beauty for 13%, men's apparel & accessories for 22% and home goods for 13%. Those proportions have remained more or less stable for several years, but accessories have slowly but steadily increased at the expense of women's apparel. More recently, it has also pushed aggressively into home appliances, a new area for the chain, with showrooms opening in more than half the store estate during 2016 and 2017.

A key pillar in of Ron Johnson's proposed relaunch of JC Penney in 2012 was a partnership with home guru Martha Stewart to launch an exclusive range of home products, through another new instore "shop". Stewart already had a near-identical deal with rival (but more upscale) Macy's, but Penney hoped to bypass this because of a loophole in Stewart's contract with Macy's which allowed her to open standalone outlets of her own elsewhere. Macy's sued to block the rival line, arguing that an in-store concession was not the same as a standalone store, and it was granted a preliminary injunction in summer 2012. With neither side prepared to back down, the case went to court in early 2013. With a ruling expected by the end of the year, Penney scaled back its agreement with Martha Stewart to exclude kitchen, bed and bath products, a move seen by Macy's as a clear victory. As had been widely anticipated, the court found in favour of Macy's in 2014.

This was not the only of Johnson's initiatives to hit speed bumps. Another pillar introduced by the new management team in Spring 2012 was to abandon the store's long-established practice of widespread discounting and couponing. Instead it introduced what it calls "Fair & Square" pricing, with all goods divided into three price brands of "Everyday" products at regular prices, selective "Month-Long" discounts of selected items every month, and special "Best Prices" days on the 1st and 3rd Friday of every month offering extra discounts. There would also be one special promotional day every month, in which stores offered additional products and extra savings. However the big launch for the new strategy failed dismally to win over customers. The "Month-Long Value" banner was dropped in June 2012 in favour of old-style "sales", and after a truly horrendous final quarter, the new pricing strategy was abandoned altogether in January 2013.

There are smaller spin-off divisions, JC Penney Optical, serving the eyecare sector; photographic studios franchise JC Penney Portraits; and also hair salons and custom decorating centres. For years, the group also managed a substantial mail order division, JC Penney Direct, traditionally the #1 catalogue shopping business in the US. It was supported by the country's largest private telemarketing network, dedicated catalogue departments in virtually all stores, and around 450 additional catalogue centres around the country run by franchisees. However, despite a steady increase in internet-based sales, the direct business had been under considerable pressure since 2001. Instead, the group poured resources into supporting the business and strengthening its online presence, and these efforts began to deliver results in 2003. As a result, the company stopped publishing its two big season catalogues in favour of smaller, more frequent and more specialised books, and began to phase out the traditional printed catalogue service altogether in 2011. E-commerce sales broke the $1bn barrier for the first time in 2005, rising to $1.5bn by 2010. Yet even they suffered steep declines under Penney's new management team, falling back to just $1.02bn for the year ending 2013. They are no longer declared separately. The group's storecard operations are outsourced to Synchrony, formerly GE Money.

For 14 years, JC Penney was the official sponsor of the annual Academy Awards ceremony. It finally bowed out in 2016, to be replaced by rival Kohl's.

The group's non-core and foreign operations have all been sold. A small portfolio of Penney stores in Mexico was sold during 2003. A controlling shareholding in Brazilian department store chain Lojas Renner was divested in 2005 in a public offering. Until 2004 the group also owned drugstore chain Eckerd, with almost 2,700 outlets. That business was sold in 2004 for around $4.7bn, with its outlets split between Canadian drugstore operator Jean Coutu (now Rite Aid) and US rival CVS.

Financials

After huge losses in 2000, JC Penney delivered steady but modest financial recovery between 2003 and 2007, until set back by the harsh economic climate of 2008. That year revenues dipped 7% to $18.5bn, the lowest figure since 2005. Income from continuing operations more than halved to $567m. In 2009, revenues fell by a further 5% to $17.6bn, while net income plunged by 56% to $251m. Both figures were the lowest for more than five years, and comparable store scales declined by more than 6% year-on-year. There was a modest recovery in 2010, with total revenues rising 1% to $17.8bn, and net income up 55% to $389m, but the group suffered further pain from its complete overhaul for the fiscal year to Jan 2012. Revenues slipped by almost 3% to $17.26bn, and the group reported a net loss of $152m. That included a restructuring charge of around $450m. This was supposed to mark the low point before a sudden upsurge prompted by new CEO Ron Johnson's more focused promotional strategy.

Yet the new strategy not only failed to deliver a turnaround but prompted a sharp decline in performance. Despite heavy promotional spending and widespread publicity, Penney's sales plunged during the year, down by at least every 18% every quarter, and by a shocking 32% in the crucial holiday trading period. Full year revenues slumped by as much as 25% to just $12.99bn, the lowest figure for almost 30 years. That resulted in a net loss of $985m, more than half of it in just the final quarter. Women's fashion accounted for 25% of total revenues in 2011, men's apparel for 20%, home for 15%, children's apparel and women's accessories for 12% each.

Despite the change in management, performance continued very weak throughout the following year, though there were finally signs of improvement over the 2013 holiday period, with a 3% comparable increase in sales. For the final quarter of the year to Feb 2014, same store sales actually rose 2%, their first increase since 2011, and the group scraped a modest profit, though all from accounting adjustments. However total annual revenues slipped by a further 9% to $11.60bn and net losses ballooned by almost 41% to $1.49bn.

There was continuing improvement in fiscal 2015, although higher expenses resulted in a surprise loss for the holiday quarter. Full year revenues rose 3% to $12.26bn, with same-store growth of over 4%. However that figure was still far below past highs. Net losses reduced to $771m, the fourth consecutive annual loss. There was another modest increase in the year to 2016 to $12.63bn, but a fifth straight loss of $513m.

For the year to 2017, topline slipped back again to $12.55bn, but the group was finally back in the black - or at least break-even - with net income of just $1m. EBITDA almost doubled to over $1bn. Same-store sales were entirely flat year-on-year, but slipped by 0.7% in the final quarter, and began to fall at an even higher rate during 2017. That prompted a further slump in the group's share price to all-time lows.

Management

Ron Johnson's disastrous reign as CEO of JC Penney came to an abrupt end in April 2013 after 14 unhappy months. His predecessor as CEO, Myron "Mike" Ullman, was reappointed to that role. Michael Francis, the highly regarded former CMO of Target, was recruited by Johnson to become group president in 2011, but left the company abruptly in summer 2012 after just eight months as performance slumped. Michael Kramer, previously COO, left the company soon after Johnson's departure in Spring 2013. With signs of increasing stability in the second half of 2014 under Ullman, the group announced succession plans. Marvin Ellison joined the group as president (from Home Depot) and succeeded Ullman as CEO in August 2015. At that point, Ullman became non-executive chairman, taking over from Thomas Engibous. Ullman passed over the role of chairman to Ellison the following year. However, in May 2018, Marv Ellison announced his resignation to take over as head of Lowe's. Until a fulltime CEO replacement can be appointed, JCP was led by a four-person senior management team comprising Jeff Davis (CFO), Joe McFarland (chief customer officer), Therace Risch (chief information & digital officer) and Mike Robbins (EVP, supply chain). Ron Tysoe becomes chairman. Jill Soltau was eventually confirmed as CEO in October 2018.

The marketing team was headed for several years by Mike Boylson, EVP & chief marketing officer. He retired in summer 2011. Former Coca-Cola marketer Sergio Zyman was brought onboard by Ron Johnson during 2012 as a consultant, along with former Aflac CMO Jeff Herbert. Debra Berman was poached from Kraft in July 2013 to become SVP, marketing under Ullman's second term as CEO, but she left abruptly in Mar 2015. Her successor was Mary Beth West, who was appointed a month later as EVP & chief customer & marketing officer. However, West too moved on in Spring 2017 (to join Hershey), and was eventually replaced by Marci Grebstein, the company's 5th marketing chief in six years. She too departed at the beginning of 2019. Shawn Gensch was named as chief customer officer.

JC Penney's biggest shareholder was until recently Pershing Square Capital Management, the vehicle for activist investor William Ackman, who was instrumental in recruiting Ron Johnson as CEO in 2012. Pershing had held a financial stake of just over 26%, and 15% of voting rights. An affiliated fund, Vornado Realty Trust, had an additional 11% equity stake. A row erupted in 2013 between Ackman and the Penney board following Johnson's dismissal and the reappointment of Mike Ullman as CEO. Ackman subsequently sold his shares at a significant loss.

Background

James Cash Penney began his retail career in 1898 as a shop assistant in Golden Rule Stores, a small chain of stores in Wyoming. The chain's owners were impressed with the 23-year-old and installed him as manager and partner in a new store in the mining town of Kemmerer, which opened in 1902. Penney broke with tradition by operating on a cash-only basis and set fixed prices for goods, instead of offering discounted prices depending on each shopper's status in the town as had previously been the norm. The business was so successful that Golden Rule's owners quickly gave Penney two more stores to run, and subsequently agreed to sell all three outlets to him in 1907.

Now the owner of his own small chain, Penney expanded his empire rapidly. Each new store was established as a partnership between Penney and a resident store manager. By 1912, there were 34 outlets, with combined sales of over $2m. Each was obliged to operate by strict guidelines for providing the best service and courtesy to customers. Article 1 of The Penney Idea, his code of conduct drawn up in 1913, was "To serve the public, as nearly as we can, to its complete satisfaction." That year, the chain changed its name from Golden Rule to JC Penney Inc and set up headquarters in New York. By 1915, it had expanded to 86 stores, then almost 200 by the start of the 1920s. That decade saw astonishing growth, as Penney opened on average a new store every 3 days. By 1930, the small chain of 3 outlets had mushroomed to almost 1,400, with one in almost every small town across the country. Despite the Depression, expansion continued during the 1930s, but at a much slower pace. By 1940, the chain had grown to almost 1,600, with sales of over $300m.

In the post-war years, the company opened its first "drive-in shopping centers", larger stores situated off the main street. As sales climbed beyond $1bn, the group developed these outlets into fully-fledged department stores offering a wider variety of merchandise. In 1958, JC Penney introduced customer credit for the first time, and added restaurants and garden centres to its product range. In 1962, the group acquired mail order business General Merchandise which it relaunched as the JC Penney Catalog the following year, with home sales rocketing to $200m by the end of the decade. In 1967, the store branched out into financial services, and acquired the Thrift Drug Company two years later.

James Penney died in 1971 aged 95. Over the following years, sales continued to grow, more than doubling by 1980 to $11bn, but the group began to find other retailers stealing parts of its market. More importantly Penney's was damaged by unsuccessful attempts to transfer its US department store concept to Europe. Chains in Belgium and Italy were bought but quickly sold. Too broadly based to compete on all fronts, JC Penney restructured in 1983 to concentrate on apparel, leisure lines, and soft home furnishings, and acquired First National Bank of Delaware, renamed JC Penney National Bank, to issue credit cards.

As the 1990s arrived, the group continued to refine its audience, concentrating more closely on the women's market. In 1995, another foray abroad, but closer to home, led to the opening of a first store in Mexico. At the same time, the Thrift drugstore business was bolstered with a series of acquisitions including Kerr Drug Stores in 1995 and Fay’s in 1996. The purchase of Eckerd Corporation in 1997 for $3.3bn made JC Penney the country's #4 drugstore business with over 2,600 outlets. In early 1999, Genovese Drug Stores were added to the portfolio.

The group began to pull out of financial services in 1997, selling its credit card business to Associates First Capital, and JC Penney national bank branches to First National Bank of Wyoming. In 1999, the group sold its JC Penney private label credit card business to GE Capital, which continues to operate it under license. Sales in 1999 were $31.7bn, including almost $4bn from the Big Book catalog. But the group was already under considerable pressure from Wal-Mart and other discounters. JC Penney's sales slumped at the close of the decade, and the company had to write off substantial amounts as it consolidated its portfolio of drugstores.

The group announced plans to spin off a stake in Eckerd to raise its share price, but cancelled the IPO as a result of stock market volatility. It also closed around 100 under-performing department stores and 350 drugstores in 2000 and 2001, and sold its direct insurance sales division to Dutch insurer Aegon for $1.3bn. Rebranded as Stonebridge Life, these insurance plans are still sold via JC Penney stores. In a bid to increase the appeal of its tired stores, the group launched a $1bn investment program in 2002 for refurbishments. Myron Ullman, a former CEO of luxury group LVMH, replaced Allen Questrom as chairman & CEO at the end of 2004.

Last full revision 21st July 2017

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