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Where's the Apple magic? That's the question J.C. Penney (NYSE: JCP ) investors must be asking by now. When the tech giant's former retail chief, Ron Johnson, took over as CEO of the department-store chain late last year, he didn't come alone: He brought a lot of high hopes with him.
Seven months down the line, the excitement has fizzled out, and everything seems uncertain. Two out of the three areas that were a part of the turnaround strategy -- new management, new pricing strategies, and new concept stores -- are already showing signs of stress.
A string of bad news
It all started with miserable first-quarter numbers. All eyes were on the retailer's quarterly results as a barometer of whether Penney's new pricing strategies were finding any takers. The answer was an emphatic no.
Customers who had become accustomed to Penney's double advantage of deep discounts and coupons weren't pleased with their sudden vanishing act, as Johnson replaced them with everyday low prices and occasional clearance sales. Penney's same-store sales stumbled 18.9% while its rivals benefited.
But even though Macy's (NYSE: M ) has effectively acknowledged gaining from Penney's "non-promotional price streamlining," the company doesn't really believe its customers are running away. Johnson thinks Penney's new deals weren't being communicated effectively to customers. I can't say he's entirely wrong: I felt confused by terms like "month-long values" and "Best Price Friday" when I went to shop at Penney. It's not a big surprise that the man behind the retailer's marketing efforts, President Michael Francis, has left the company.
Francis' exit has further shaken investors' confidence in Penney's management. He was considered one of the prized executives whom Johnson had roped in to help him turn the company around. Snagging Francis looked like a wise move at the time, as the two had previously worked together to take discount chain Target (NYSE: TGT ) to new heights.
Steep hill to climb
I think the company's hopes are now pinned on the revamped Penney stores that should crop up in a few months. The mini-town shopping concept that will entail stores-within-stores and house as many as 100 brands sounds at least interesting. The company has already signed on some big brands -- Nike, Puma, and Levi's to name a few. Pacts such as the one it signed with Martha Stewart Living Omnimedia (NYSE: MSO) is another tool Penney can use to take Macy's head-on.
Will Johnson's Apple Store magic will work for Penney? It won't be an easy task, as rivals are catching up fast. Target is also going the "store-in-a-store" route and rolling out specialty shops -- but remember, Target also sells Apple products, which by itself is a huge advantage. Close rival TJX (NYSE: TJX ) , meanwhile, is treating customers to an increasing number of high-end luxury brands. TJX's forte lies in its deep discounts -- a strategy that Penney has done away with even as it works wonders for TJX -- the company beat Street estimates in its first quarter.
The Foolish bottom line
This is a tricky situation for Penney. It won't be paying a dividend anymore, as it needs cash to convert its huge transformation plans into action. Investors who are willing to forgo dividends and keep faith in the company are waiting to see Johnson deliver, but Francis' exit has just made things seem a little tougher.
Fool colleague Shubh Datta is willing to give Johnson the benefit of the doubt. Sure, you can't just write off the man behind the Apple stores so soon, but I'm wary. I think I need one no-nonsense quarter and some positive customer feedback before banking on Penney. What's your call? Let us know in the comments section below.
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