It's one thing to sit on the ship deck and watch as the iceberg comes floating up, and it's an entirely different thing to clamor down into the belly of the ship and bail out with a thimble once the collision has happened. J.C. Penney (NYSE: JCP ) is running downstairs even as we speak. The company issued its fourth-quarter earnings last night and the results are dire. Revenue was down 28% and comparable-store sales were down a shocking 32%. That poor showing helped pull comp sales for the year down 25% and all but sealed the fate of CEO Ron Johnson. The stock was down 15% in premarket trading following the announcement.
The bad and the ugly
J.C. Penney's last 12 months have been hard to watch. This time last year the investing world was abuzz with the new pricing system that Johnson had brought in. Twelve months later, we're seeing the devastating impact that a bad decision can have on the long-term viability of a company. Over the past year, J.C. Penney racked up a net loss of almost $1 billion, or $4.49 per share. Despite all that, the company managed to burn down its cash position less than analysts had been expecting. It ended the year with $930 million on hand, down from $1.5 billion a year ago.
The coupon system has now gone by the wayside, and the company reentered the land of the discount at the end of January. Commenters can argue over what that says about the American shopper, but it says something very clear about Johnson's plan. As he said on the call yesterday, "We also made some big mistakes and I take personal responsibility for these." That seems to be an understatement, but it's more of an admission than most CEOs give.
What can be done
Let's be clear -- this isn't the same turnaround story in 2013 as we were reading in 2012. J.C. Penney has fallen a far distance from this point last year, and it's going to take a lot more than another non-sales gimmick to give the company a boost. Right now, all its efforts are focused on its shops-within-stores plan. So far, the company has set up productions with Izod, Liz Claiborne, and Levi's, to name a few. In recent weeks, the spotlight has been turned on the company's fight with Macy's (NYSE: M ) over a contract with Martha Stewart Living.
Regardless of how that case turns out, J.C. Penney is going to need to work to get customers back from its competitors. Macy's just saw a quarterly comparable sales increase of 3.7%, which is surely helped by customers fleeing JCPenney locations. But it's also indicative of Macy's doing something right that J.C. Penney does wrong. Maybe it's Macy's attempt to build an omnichannel offering -- allowing customers to shop online, in-store, and using a mobile device in a seamless manner -- something that Nordstrom has been working on as well.
J.C. Penney could certainly use a boost in online sales. With all the focus on its physical stores, the online segment seems to have fallen into even worse disrepair -- online sales were down 34% compared to last year. Compare that to the success that other brands have had with omnichannel efforts. Macy's saw a 48% increase in online sales in its fourth quarter, while Nordstrom increased direct sales by 31%.
While Johnson's single-mindedness and obsession with the in-store experience was supposed to be his strength, his lack of attention to online could end up hurting the business. In 2013, the company needs a renewed focus on its online customer base, or else it risks falling even further behind.
J.C. Penney is failing. The turnaround storyline has vanished completely and any bounce from its current position will represent the beginning of a new story. It's been said in just about every press release accompanying the fourth-quarter news, but here it is again: Johnson needs to fix this in the next few quarters or he needs to get out. The fight with Macy's over Martha Stewart is just one more poor choice in a line of poor choices. There's almost no chance, in my mind, that J.C. Penney wins that case outright. That means sharing the spotlight with Macy's at best, or wasted investment and energy at worst.
Until Johnson makes a meaningful, positive impact on this business, I can't trust his judgment. If you can't trust the guy running the place, then you have no business investing in the company. I wouldn't touch J.C. Penney right now with a 10-foot pole.
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