J.C. Penney's Exclusive Brands Are Unlikely to Generate Sales

As the fourth quarter comes to a close, most retailers plan to announce holiday season sales in mid-February. Top department-store retailer Macy's (M 4.06%) will likely outperform J.C. Penney (JCPN.Q) and Kohl's (KSS 4.55%), as has been the case for the last few years, with J.C. Penney being the real loser of the bunch.

Ever since the Great Recession hit, J.C. Penney has suffered from a myriad of problems ranging from CEO issues to the decision to eliminate store coupons, all of which led J.C. Penney's stock to tank below $7 after once being worth more than $80 a share as recently as 2007. Its current share price is hard to swallow when compared to some of its peers.  For instance, company stock in both Macy's and Kohl's is currently trading for over $50 a share.  A turnaround effort is currently being mounted at J.C. Penney involving underperforming store closures and a "getting-back-to-basics" attitude, but are these steps honestly going to restore the retailer?

All about the brands
While there are many reasons why customers may or may not shop at a given department store, one reason is simply the products offered by that store. The retailer who best understands the current market's consumer trends will likely gain the most consumer traffic. If the prices for those brands are too expensive, customers will normally find something similar by choosing to purchase items from that retailer's exclusive and private brands.

But remember, most customers want the market's most popular brands, which largely consist of non-exclusive labels. If they can't afford these brands, then and only then will they resort to the retailer's exclusive brands.

Back by company demand
J.C. Penney's CEO Myron Ullman recently announced plans to revitalize several of the company's exclusive labels that were once consumer favorites before former chief Ron Johnson stepped in and cut these brands. Two of these brands are Worthington and St. John's Bay women's apparel line. J.C. Penney hopes that by focusing on its private-brand collection, it will be able to bring back once-loyal customers, who represent mostly middle-aged women, as well as attract younger audiences to its exclusive brands.

While J.C. Penney's private brands represented 55% of its total sales for 2011 and 53% in 2012, J.C. Penney's revenue also fell 25% from 2011 to 2012, which does not speak volumes for its private labels. In fact, the retailer may be relying too much on its exclusive collections to turn things around. See chart below.

The fact of the matter is that customers who once shopped at J.C. Penney now shop at Macy's, whose private labels represented just 20% of total sales for 2012, and yet its total sales have continued to climb year over year. This is because Macy's offers a large assortment of non-exclusive brands that J.C. Penney doesn't. Rather than solely focusing on its private labels, J.C. Penney may want to try adding non-exclusive brands to its stores, such as Ralph Lauren or Michael Kors, that customers desire, and then start pushing its exclusive brands on them.

J.C. Penney has always relied heavily on its exclusive brands to generate company profits, but this strategy does not appear to be working in its favor, as the company still suffers from a net loss. Instead, J.C. Penney may want to experiment with non-exclusive brands since this is working out so well for Macy's.

It's all about traffic
Bringing customers back through its doors should be J.C. Penney's top priority. While its private labels account for the majority of its annual sales, J.C. Penney will have great difficulty encouraging new and old customers to check out its private labels, even if they have been somewhat redesigned to reflect fashionable styles.

The fact that Macy's sells a wide variety of non-exclusive brands not only draws customers through its doors due to the sheer popularity of the brands but also serves as an excellent contrast to sell Macy's own exclusive brands. No one goes to J.C. Penney to buy its private-label brands.

However, customers go to Macy's to look at Michael Kors shoes or a Ralph Lauren sweater, and if they don't feel they can afford it, they might just buy the Macy's brand alternative. Either way, Macy's scores the sale and wins. No customer these days is going to go out of their way to check out a retailer's private labels; they will only stumble upon it in the process of looking for a non-exclusive brand. Therefore, J.C. Penney should reevaluate its possibilities and ask itself, "Will our private labels REALLY lure customers through the door to take a closer look?"

Foolish takeaway
While J.C. Penney should be applauded for doing its research and determining what things made its stores successful back in the day, it may soon find that unfortunately things do change in the eyes of consumers. Unfortunately, this is a new era with different, ever-changing consumer tastes. People find new brands they like and reject brands they used to purchase.

For Foolish investors, do not get too excited about J.C. Penney's latest game plan to relaunch several of its private labels, as the strategy is unlikely to resonate with consumers. It's possible that this move could bring back some traffic, but it is unlikely to bring sales back to where they once were in the face of Macy's ability to offer both exclusive and non-exclusive brands.