J.C. Penney (NYSE:JCP) is apparently over its midlife crisis. Having pursued millennial consumers -- first by trying to be a department store's version of Apple, then by changing its style -- the retailer is now willing to settle down again and be the retailer beloved by middle-aged moms. But will they take it back?
The Wall Street Journal [subscription required] says the ailing department store chain is going back to its roots, if only out of necessity, because its efforts to woo younger consumers has failed. Following Marvin Ellison's stable but otherwise lackluster tenure as CEO, the retailer is looking for someone who understands what its core customer really wants: clothing.
Pulling on the thread
J.C. Penney has been something of a ping-pong ball, bouncing from strategy to strategy as it has cycled through three chief executives in seven years. It is now being run by a four-person team since Ellison jumped ship earlier this year to head up Lowe's.
Each of those former CEOs had a different idea of what the retailer of the future should look like, but all seemed to miss the one consistent theme that attracted shoppers to J.C. Penney in the first place.
Former Apple executive Ron Johnson downplayed the retailer's store brands like St. John's Bay and Arizona jeans in favor of national brands. Those were brought back when Myron Ullman succeeded Johnson as interim executive, but when Ellison took the helm, he cut floor space for clothes and focused more on what he was comfortable with from his time with Home Depot, namely appliances.
The missing link
It's telling that neither Johnson nor Ellison had any relevant retail apparel experience (nor does the current executive team), though clothing accounts for over half of J.C. Penney's $12.5 billion in annual sales. It's also a higher margin business, around 40%, compared to around 20% for appliances.
While there was a strategy involved in targeting appliances, as Ellison sought to take advantage of Sears Holdings' woes and siphon off its consumers, it failed to create momentum.
J.C. Penney has had to sell off hundreds of millions of dollars in assets: some $327 million in 2016, $163 million last year, and some $39 million in the first quarter of 2018. Since then, it's announced plans to sell its three corporate jets and shed a distribution center for $70 million. While its balance sheet is improving, it ended the first quarter with $4.4 billion in long-term debt and capital lease obligations, against just $181 million in cash and equivalents. It has also been unprofitable for 15 of the past 17 quarters.
J.C. Penney admits it "did lose our way," in the words of Executive Vice President of Supply Chain Mike Robbins, who is a member of the quartet running the company now. By pursuing millennial shoppers, Robbins said, "that took our eye off our core customer."
A proper balance
Yet it's not the case that a retailer must accept the customers it has and not pursue other demographics. Although J.C. Penney has been typecast as a place where your mom goes to shop, the retailer has actually been very successful in attracting younger shoppers through its partnership with beauty care leader Sephora. And remember that Johnson was brought in to shake things up precisely because J.C. Penney was in a tailspin with those middle-aged women.
The problem seems to be more that the department store has been operating on an either/or strategy -- either it's fully focused on millennials or it's all-in on its core. A reasonable case can be made that a more-balanced approach can work, as both Kohl's and Macy's have been able to better navigate the choppy waters between the two groups.
Kohl's reported a 3.5% increase in total revenue in the fiscal first quarter on a 3.6% rise in same-store sales. Macy's reported similar gains, with revenues 3.6% higher on a 3.9% gain in comps. J.C. Penney sales fell 4.3% in the period as comps rose incrementally, 0.2%.
An older consumer cohort does have deeper pockets, and it is willing to spend. But it is aging, so looking to the next generation of shoppers is a must. J.C. Penney says it is hunting for a new CEO with relevant retail apparel experience that will resonate with those 50- and 60-year-old women. But with Penney having flitted from strategy to strategy so many times, will customers of any age group know what the retailer represents?
It may be that The Wall Street Journal is correct in wondering whether anyone can succeed in the chief executive position, regardless of their area of expertise.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short September 2018 $180 calls on Home Depot, and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.