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3 Things J.C. Penney's New Owners Need to Do, Fast

By James Brumley – Sep 16, 2020 at 8:38AM

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The same challenges that pushed the iconic department store into bankruptcy will be waiting for it on the other side.

It's (more or less) official. Mall owners Simon Property Group (SPG -2.13%) and Brookfield Property Partners (BPY) have agreed to acquire beleaguered department store chain J.C. Penney (JCPN.Q) out of bankruptcy. The somewhat complex deal -- its previous lenders are still lenders, and a new real estate investment trust (REIT) will own much of its real estate -- is expected to be completed before the end of this year. More importantly, it keeps the 118-year-old chain alive.

But none of this dealmaking changes the fact that J.C. Penney is struggling for a reason. Its operational struggles -- which led to a 44% year-over-year revenue tumble and a loss of around $400 million for the quarter ending on Aug. 1 -- will simply become Brookfield's and Simon's problems. The two mall owners have demonstrated a little retailing acumen with their co-ownership of Forever 21 and Aeropostale. J.C. Penney, however, could prove to be their toughest challenge yet.

To that end, Simon and Brookfield will want to address three specific matters ASAP.

Numbered wooden blocks stacked up in order, from 3 to 2 to 1

Image source: Getty Images.

Think more strategically, starting with e-commerce

According to data from Kantar Retail, the typical Penney's customer is a 51-year-old woman, probably a mom, earning around $63,000 a year and looking for a bargain. Rival department stores like Macy's and Nordstrom tend to cater to a younger and more affluent consumer.

J.C. Penney made a play for younger shoppers in 2016. It only ended up alienating its remaining customers without ever meaningfully attracting its newly targeted demographic. By 2018, it was prioritizing older moms again, yet struggling to win them all back.

J.C. Penney's lackluster online presence -- e-commerce accounted for 14% of its revenue last year -- may be contributing to these struggles with the company's best customer prospects.

Verto Analytics data from 2018 suggested that baby boomers account for about as many regular online shoppers as the Gen-X crowd and millennials do, even though the internet wasn't part of their world for most of their lives. Verto also found that the typical demographic profile of a "super shopper" who spends the most time shopping online -- an average of 44 hours per month -- is a 47-year-old woman with a household income of less than $50,000. That sounds a whole lot like J.C. Penney's demographic sweet spot. This consumer may not be a heavy spender, but she has clearly adopted e-commerce in a big way.

Use promotions that all consumers understand and trust

Prior to Ron Johnson's hiring as Penney's CEO in 2011, the department store chain's promotional approach was painfully predictable. Core goods would likely be on sale anywhere between 20% and 50% off a couple of times a month. When the sales themselves weren't a big enough draw, mailed coupons helped to get shoppers in the door. Johnson's biggest failing was arguably his decision to change from this promotional approach to everyday low prices that didn't require a sale or coupon. Rightly or wrongly, customers didn't feel like they were getting the value they used to.

J.C. Penney has since reverted back to its previous pricing approach...mostly. Two challenges linger, though.

The first is that a certain swath of J.C. Penney's pre-Ron Johnson customers aren't returning, even though coupons and sales have. They've moved on to other shopping options, assisted of course by the internet.

Second, while he may have moved too quickly, in some ways Ron Johnson was right. Some older shoppers may have been trained to respond only to a steep discount, but the web has largely democratized discounts for other shoppers (and millennials and Gen-Xers in particular). Today, many consumers know that some venues effectively offer a perpetual 'sale' price on certain goods. Developing promotional efforts that appeal to all sorts of consumers can be tricky, but it's a fine line the company will have to learn to walk.

Overhaul the merchandise mix, particularly for women

Finally, it's been a weakness for years now, yet it remains a problem: J.C. Penney's merchandise mix (and its women's clothing lineup in particular) feels out of place in the modern retailing world.

It's admittedly a challenge. J.C. Penney's most important customer is still a value-minded middle-aged woman who is looking for bargains on basics for her whole family. It needs to ease into new inventory that's fresh and unique to attract younger demographics but simultaneously maintain a mix that keeps that 50-year old, middle class mom comfortable in its stores.

To its credit, Penney's was starting to move toward a more relevant merchandise assortment before the COVID-19 pandemic took hold. Last year, the company hired former Guess executive Victor Ejarque Lopez to serve as the merchandise manager of women's apparel and named Michelle Wlazlo the company's chief merchant. Wlazlo came from Target, where she was senior vice president of apparel and accessories merchandising. In February of this year, Penney's relaunched its a.n.a private-label apparel brand with a new focus on denim. This followed last year's unveiling of an experimental store in Texas with curated inventory meant to meet women's clothing needs specifically for work, for casual time, and for fashion. These are all steps in the right direction. But the fact that such big steps needed to be taken at all indicates the depth of Penney's challenge on the merchandise front.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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