In 2007, shares of department store J.C. Penney (JCP) reached $80. In 2015, four years after a failed makeover attempt by former CEO Ron Johnson and the following struggle to keep the company out of bankruptcy, the stock trades for less than $10 per share. JCP has posted a net loss in each of the past four years, with revenues falling from $17.7B in 2011 to $11.9B in 2014. Even though progress has been slow, same-store sales are growing once again and revenue projections for fiscal year-end 2015 are $12.3B.1 A return to profitability would certainly be a positive development for the company and its shareholders, but there are a few major problems that will continue to keep J.C. Penney in the red. This paper will examine the problems faced by J.C. Penney using information collected from reputable Internet sites to draw a conclusion on solutions that would repair the company’s image and profitability.

Brief History of J.C. Penney

For over a century, J.C. Penney has been one of America’s leading retailers with steady growth since its opening in 1902. At its peak, JCP had 1,109 department stores operating in the United States and Puerto Rico. In addition to its brick and mortar locations, JCP.com was one of the largest apparel and home furnishing sites on the Internet and the nation’s largest general merchandise catalog business.2 Through these retail channels, J.C. Penney offers a wide array of national, private and exclusive brands, which reflect the Company’s commitment to providing customers with style and quality at a smart price. JCP is traded on the New York Stock Exchange and although it has had a significant downfall in its stock price, it is executing a strategic plan to be the growth leader in the retail industry. “Key to this strategy is J.C. Penney’s “Every Day Matters” brand positioning, intended to generate deeper, more emotionally driven relationships with customers by fully engaging the Company’s 150,000 Associates to offer encouragement, provide ideas and inspire customers every time they shop with J.C. Penney.”2

The Downfall of J.C. Penney

J.C. Penney’s mission has changed very little since Mr. James Cash Penney founded the Company at the turn of the 20th Century. Its primary mission was, and is, to sell merchandise and services to consumers at a profit in a manner that is consistent with the Company ethics and responsibilities. What has changed significantly over the past couple decades is the vision of how the company can remain profitable in a technology-driven, customer-focused marketplace.
In 2011, under the direction of CEO Ron Johnson, the J.C. Penney Company underwent a transition from a value retailer to a streamlined, customer-driven retailer in order to set itself apart from its biggest competitors, like Macy’s and Kohl’s. Previously, J.C. Penny’s was focused on general storewide promotions. Johnson retooled JCP’s image to reflect a standard set of prices and special savings, with the expectation that the customer would appreciate not being inundated with sales incentives. 3
However, even before Johnson joined as CEO, the company had started moving away from its middle-income American target customer and started trying to appeal to a higher-income clientele. In 2006, JCP decided to offer a diverse customer experience by incorporating outside companies, like Sephora Cosmetics and Seattle's Best Coffee, into its stores. At the time, customers seemed to like the outside companies pared with the old image of J.C. Penney, but critics claim that introducing the other brands made J.C. Penney lose its identity and ultimately dilute its once strong brand name. Unfortunately for the company, “its customer base wasn't interested in shelling out the money to get their nails done at a J.C. Penney.” 3 As a result of losing loyal customers, the company has experienced a severe drop in productivity and profitability at nearly all its retail stores.
An important statistic for all brick and mortar retailers is sales per square foot. This is basically a measure of the productivity for the stores, and it is a good way to compare competitors. In 2014, J.C. Penney managed to generate revenue of $155 per square foot of selling space. This is down more than 25% from 2011 and nearly 40% from the peak year of 2006. In contrast, competitor Kohl's generated $226 in revenue per square foot in 2014, similar to J.C. Penney's numbers before the big collapse in 2012. 4
J.C. Penney's business model does not work when revenue per square foot are so low, so the challenge is to increase sales. The changes that Johnson made, such as introducing everyday low pricing instead of having sales, drove previously loyal J.C. Penney shoppers away. While those changes have since been reversed, it has not really helped rebuild the reputation that took so long to build. Customers no longer trust J.C. Penney. So the obvious question is, how does J.C. Penney regain its customer’s trust in time to save the company?
Proper Course of Action to Repair the Company
Customers are not just going to come streaming back to J.C. Penney. Instead, the company is going to have to win market share from its competitors. During the fourth quarter of 2014, J.C. Penney reported same-store sales growth of 4.4%. That sounds positive, but it is not much higher than the 3.7% growth reported by Kohl's. 4 J.C. Penney will need to grow at a much higher rate than its competitors in order to make up ground, but it is not happening fast enough.
Low productivity in JCP stores will continue to weigh on its earnings. During the past few years, J.C. Penney has vastly increased the amount of debt on its balance sheet. This was out of necessity, as the company was hemorrhaging cash, but with profits likely still years away, J.C. Penney has no way to reduce its debt load. At the end of 2014, J.C. Penney had $5.4 billion of debt, up from just $3 billion at the end of 2012. In 2014, J.C. Penney paid $406 million in interest, or about 3.3% of revenue.5 Not only does the company need to turn an operating profit soon, it also needs to turn a big enough profit to cover the interest payments. In 2014, it was about $700 million short.
In an effort to get back to the path of profitability, J.C. Penney closed 89 stores and cut nearly 4,000 jobs, bringing its fleet down to 1,020 stores. 1 While store closings are usually a sign of trouble for a retailer, in J.C. Penney’s case, shareholders and the public should know that the company is proactively taking action to reduce overhead and increase productivity at its top-selling stores. JCP is not the only retailer that is looking to cut costs. Macy's cut 2,500 jobs in 2014 in order to maintain their current profit margins and to avoid the problems like J.C. Penney is currently facing. 1
In addition to increasing productivity, J.C. Penney’s needs to focus on “improving its product strategy so that it is streamlined, efficient and cost effective, while still meeting customer’s need,”3 says current CEO Mike Ullman. The company’s main focus is to fix its sourcing relationships in foreign countries. The J.C. Penney’s brand has to rebuild the reputation that was destroyed under Ron Johnson. Johnson believed he could change J.C. Penney’s image by focusing on famous national brands, while ignoring the unique strength of J.C. Penney private labels. These private brands registered billions of dollars in sales and represented fashion and value to the J.C. Penney customer. Ken Mangone, the Executive Vice President of Product Development, Design and Sourcing, is responsible for restoring the successful private brands that had been the mainstay of the company. “Ken’s long-standing relationships with leading suppliers are critical to the success of the company. His job is to ensure that the quality of the product is as good if not better than national brands and that the consumer is motivated to buy because of the value,”3 says Ullman.
Conclusion
In conclusion, J.C. Penney's business is improving, but just because things are moving in the right direction does not mean that a successful turnaround is imminent. Sales are unsustainably low, and it is making no real progress at winning market share from competitors. With more than $5 billion in debt, the company is faced with a monumental challenge.
For J.C. Penney to return to profitability, it needs to improve its productivity by focusing on the revenue per square foot metric. The company has to continue to cut costs, but that alone cannot solve the problem. If all stores are underperforming, then the company also needs to focus on repairing the company’s image and do everything it can to regain the trust of its once loyal customers.