The latest batch of financial results from the venerable retailer J.C. Penney (NYSE: JCP) were so bad that they were almost painful to read.
Sales? A drop of 28.4 percent in the fourth quarter from year-earlier levels, pitiful for a period in which most other retailers managed to post modest single-digit gains. Same-store sales? Down 32 percent.
Profits? None to be spotted, just a loss of $552 million for the quarter, making the final three months of the year – typically the best period for any retailer – the worst for J.C. Penney. Oh, and an annual loss of nearly $1 billion.
The stock price? Down 55 percent in the last year, and with a five-year price chart that bears a strange resemblance to an amusement park’s terror ride. Reading the press release was an exercise in masochism for believers in CEO Ron Johnson, the former Apple (NASDAQ: AAPL) and Target (NYSE: TGT) exec who has proved conclusively that he can’t walk on water. (Although he has managed something almost equally impossible: making the company’s struggles in the 2008-2009 recession vanish, relative to the magnitude of its current woes.)
Henry Blodget of Business Insider has labeled J.C. Penney’s miserable showing as “the worst quarter in retail history,” and he’s right. Now it’s time to put an end to the public horror show. It’s hard to envisage a single scenario in which the retailer is anything but the walking dead. The only question is whether the death will be a slow and painful one, or whether Johnson and his board can abandon their quixotic crusade to reinvent retailing and instead oversee a quick and painless death for what is left of the company.
The problem isn’t that consumers just aren’t spending, as some of the steadily diminishing number of Penney defenders like to claim. True, no retailer catering to the lower-income demographic is having an easy time of it right about now, as their customers grapple with the effect of high gasoline prices and higher payroll taxes on their discretionary income. But Target’s http://latestnews.thefiscaltimes.com/2013/02/27/target-profit-slipped-in-winter-holiday-quarter/ stock is trading nearly 11 percent higher than it was a year ago; Wal-Mart http://latestnews.thefiscaltimes.com/2013/02/21/wal-mart-profit-up-in-key-holiday-quarter/ is up 20.4 percent and Dollar General is ahead 7.8 percent. While J.C. Penney’s sales have dropped 6.6 percent over the last five years, those at these three rivals have climbed anywhere from 13 percent at Target to 41.6 percent at Dollar General. While the environment may be making it worse, this is a J.C. Penney problem.
Part of the issue is that Penney just isn’t Apple. Its devotees had become accustomed to being offered discounts, and when you’re on a limited income and buying four pairs of shoes a year as your child outgrows each pair in quick succession, fancy in-store boutiques http://latestnews.thefiscaltimes.com/2012/12/03/more-mannequins-less-clutter-at-heart-of-jc-penney-plan/ just don’t replace a focus on discounts. Apple can afford to insist that it doesn’t offer seasonal sales of iPads and iPhones; J.C. Penney can’t tell its customers what they should do and expect them to comply rather than shrug their shoulders and head off to Wal-Mart or one of the array of other retailers catering to shoppers on a budget.
Johnson seems to have woken up to that fact, but belatedly. On the conference call following the release of the earnings, he promised to offer sales “each and every week.” That change in strategy is too little, too late, especially since rolling out his new “in store boutique” vision featuring merchandise from the likes of Martha Stewart /node/60994 and Joe Fresh is going to require cash – and there’s a lot less of that around than the company is going to need, in spite of its decision last year to axe its dividend. The temptation to cut corners on the in-store boutiques is going to be acute, and if Penney doesn’t order as much as the designers and specialist retailers were counting on then the relationships with those vendors will be in peril – as will the concept that underpins the entire turnaround vision.
True, Penney has lined up some new borrowing facilities. But that just introduces a new kind of risk to the scenario, adding the risk of credit default to the already sky-high level of business risk. And some of that risk may be being understated: Some analysts theorized that one reason the company’s cash position didn’t look far worse at year-end was that it deferred some payments to its vendors.
Some troubled companies can be saved – it’s still possible, for instance, that the BlackBerry 10 will succeed in giving its namesake company a new lease on life. Others can’t; the world around them simply has changed too much. J.C. Penney is in an odd position. It’s a company that could have survived; indeed, that should have survived, just as Wal-Mart, Target and the dollar stores are doing. It may not have thrived; it may not have generated spectacular returns for its investors. But it shouldn’t be on its deathbed. That’s what a deeply flawed strategy and a refusal to acknowledge those flaws in a timely fashion produces.
Even now, Johnson is having a hard time admitting failure. True, he has been forced to offer discounts in order to get customers back in his stores, but he is clinging to the conviction that his concept is the right one. There is a time to dispose of ideals, or to acknowledge that the market just isn’t willing to embrace them. Perhaps in a decade or two, he will be seen as a visionary whom the world unjustly despised. But this is business, and visionaries don’t always prosper, especially when they are as stubborn as Johnson is proving to be. “All we need this year is to return to growth,” he said in an interview last month, cited by The Wall Street Journal. It doesn’t matter how large, he went on to say – 1 percent or 10 percent, any growth will generate cash that the company needs to forge ahead with its “transformation.”
I have yet to see a cartoon depicting Johnson as an ostrich with his head in the sand, but it feels like it’s only a matter of time. Certainly, it’s hard to see how J.C. Penney extracts itself from its current plight under its current leadership. By comparison, Groupon’s ousted CEO Andrew Mason looks like a model of pragmatism.