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I'm Glad J.C. Penney Is Dropping Appliances. Here's Why

By Jeremy Bowman – Updated Apr 17, 2019 at 11:55AM

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CEO Jill Soltau latest move will help the company focus on its core market as it tries to return to profitable growth.

Times are tough for J.C. Penney (JCPN.Q). The department store chain's stock is trading near penny stock range, hovering around $1, and sales fell, year over year, during a holiday season that was one of the best in years for the broader retail sector, a sign its brand continues to wither.

To summarize, Jill Soltau, who joined J.C. Penney as its new CEO in October, has her work cut out for her.

Soltau brings valuable experience, having led businesses like Shopko and JOANN stores, both retailers that cater to a similar customer base as J.C. Penney, and has already begun making her mark on her new employer. In January she brought in a chief transformation officer and promoted another executive to chief stores and supply chain officer. And last week she made her first big change at the store level, saying that Penney would get out of the appliance business, just three years after getting back into it.

In a blog post, the company said it would stop selling major appliances by the end of the month in order "to better meet customer expectations, improve financial performance and drive profitable growth." The move will affect 600 stores where appliances were sold, and the company also said it would sell furniture only online and in a few Puerto Rico stores. 

Check out the latest J.C. Penney earnings call transcript.

An appliance showroom at J.C. Penney

Image source: J.C. Penney.

One step forward, one step back

When previous CEO Marvin Ellison launched appliances in 2016, bringing back the category for the first time in 33 years, it was a hailed as a bold move and a step in the right direction. Analysts said it would give the company exposure to a big-ticket category and a chance to grab market share from ailing rival Sears. However, while sales in the home category surged following that launch and other moves, J.C. Penney neglected its core categories, like women's apparel, and losses continued to pile up even while the company posted solid comparable sales growth. Over the last three years (the period that encompasses its adventure in appliances) the stock plunged 83%.

It isn't surprising that Ellison focused on the home department above all else. He came from Home Depot, having led its merchandising for about a decade, and left Penney to take the top spot at Lowe's. His expertise is in home improvement retail, but J.C. Penney is not a home improvement retailer. Penney's strengths are in soft goods like apparel, which appeal to a different customer from appliances.

Ellison's misguided foray into appliances is reminiscent of the disaster the company experienced under former CEO Ron Johnson, who came from Apple. In 2012 Johnson essentially tried a massive revamp and upscaling of J.C. Penney, which included eliminating discounts, that sent customers fleeing and caused comparable sales to plunge 25% in one year.

Both Ellison and Johnson tried to put their own imprint on the retailer, making it something it wasn't. Soltau is not doing that. She's focused on returning the company to its strengths and focusing on its biggest categories, like women's apparel.

In its statement, Penney said it was getting out of appliances in order to create "an enhanced shopping experience that inspires repeat shopping trips," and "focus on the Company's legacy strengths in apparel and soft home furnishings, which represent higher margin opportunities." 

Soltau understands that the key thing its stores need to do is bring in customer traffic and deliver profits. Appliances don't inspire frequent visits and don't bring in customers looking to spend in other parts of the store. It's also a low-margin category where the company has no competitive advantage, unlike, say, apparel, where Penney has many of its own brands that customers have been buying for decades. Customer traffic is also the reason behind initiatives like the Salon and Sephora, which do bring in frequent visits and repeat customers.

Dropping appliances won't turn around the business by itself, but it shows that Soltau won't get distracted by peripheral categories and initiatives the way her predecessors did. As a middle-aged woman, she also fits the demographic of the company's core customers and can better relate to their needs.

J.C. Penney has plenty of work to do, including repurposing underperforming store space and rebuilding the brand, but getting out of appliances looks like a step in the right direction. It should give investors confidence that they're in good hands with Soltau.

Jeremy Bowman owns shares of J.C. Penney. 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 February 2019 $185 calls on Home Depot, and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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