How J.C. Penney Company, Inc. Makes Most of Its Money

Despite efforts to change, the retailer is still overly reliant on apparel and brick-and-mortar sales.

Jeremy Bowman
Jeremy Bowman
Jun 16, 2017 at 10:47AM
Consumer Goods

J.C. Penney (NYSE:JCP) is not the same company it was 10 years ago.

The department store chain has diversified into new categories, partnering with beauty brands like Sephora and InStyle hair salons, expanding its Home offerings with branded flooring, featuring more window treatments, and now selling appliances for the first time in more than 30 years. CEO Marvin Ellison, who spent much of his career with Home Depot, has made the Home division a particular focus of his strategy -- that category has seen continued growth despite broader retail problems since it's protected from e-commerce. 

The entrance to a J.C. Penney store

Image source: J.C. Penney

However, despite those efforts to diversify, the company's biggest and most important product category remains women's apparel. Seventy percent of the company's customers are women, and the majority of the store is still devoted to apparel. Twenty-four percent of the company's sales come from women's apparel. 

Comparable sales in women's apparel have recently fallen, countering growth in areas like Home and Sephora. In the last quarter, overall comparable sales dropped 3.5%, while performance in women's apparel was even worse.

J.C. Penney does not break down sales by product category, but Ellison was not optimistic about a return to growth in women's apparel anytime soon. Problems have persisted in spite of the company's launching several private labels, including Boutique+ for plus-size women's fashion and fast-fashion takeoff Belle + Sky, among others.  

Mall-based apparel retailers in general have struggled lately as they face intensifying competition from fast-fashion retailers like H&M and Uniqlo and the e-commerce channel, where has made apparel an increasing focus. A number have announced store closings. Apparel prices have also remained flat over the last generation as competition has risen and commodity prices have fallen. Without an improved fashion lineup, J.C. Penney is likely to continue to struggle in the women's apparel segment as the headwinds against it are numerous.

The digital divide

Like other department stores and brick-and-mortar chains, Penney has invested significantly in its e-commerce platform. Ellison has touted the company's buy-online/pick-up in store program and improvements to its mobile app on recent earnings calls. Competing online has become crucial, as overall e-commerce is growing by 15% annually while brick-and-mortar apparel sales shrink. 

The retailer no longer directly reports online sales, as its omnichannel strategy blends online and offline sales with programs like pick-up in store and the vast majority of online sales still involve physical locations -- the company's footprint is key in implementing its e-commerce strategy. Still, based on estimates from prior years, the retailer makes about $1.5 billion on sales through its website and app, or a little more than 10% of total revenue. Fellow department store chain Nordstrom (NYSE:JWN) generates about 22% of its sales through e-commerce, but such a discrepancy is to be expected as Nordstrom has a more upscale clientele.

As J.C. Penney closes more stores, the percentage of sales going to the online channel will likely grow, though the company has said that closing stores leads to a decline in online sales in the surrounding area.

Department stores are in trouble for a reason, and J.C. Penney is no different. Even after all the efforts and initiatives to bring customers back after the debacle under Ron Johnson, the retailer is only borderline profitable, and its guidance this year includes a questionable gain from the sale of a distribution facility. Without that sale, management would have been forced to slash guidance.

The company needs to refresh its fashion lineup, accelerate its diversification away from apparel, and bolster its omnichannel strategy to compete with Amazon and other rivals. It won't be easy, but shuttering stores is not a viable long-term strategy, though it may be necessary.

Above all, management needs to stabilize comparable store sales, which continue to fall in spite of guidance predicting otherwise. If that key figure continues to fall, expect the stock to slide along with it.