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J.C. Penney Inc. Is Starting to Feel at Home

By Rich Duprey – Mar 17, 2014 at 4:02PM

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Recovery goes to the next level with the latest transformation.

Perhaps the biggest conceit in former CEO Ron Johnson's plan to transform J.C. Penney (JCPN.Q) was the belief that the retailer's customers weren't good enough, that it needed to attract a different, better clientele, one that would be willing to pay up for the experience of shopping there. That it failed miserably probably shouldn't have been a surprise, but the extent to which current management is bleaching the last vestiges of Johnson's presence from the retailer reveals how far it strayed from the path.

One area where that transformation was most prominent was in home furnishings, a business that was always a key component of its operations and where at one time it generated one out of every five dollars for Penney. That was just as much as its women's apparel business generated and was slightly more than either Macy's (M -1.45%) or Kohl's (KSS -0.83%) saw from their home goods departments, or some 15% and 18%, respectively. But by the end of 2012 Penney's home furnishings had fallen to just 12% of total revenues, and a radical change was initiated. 

Johnson remodeled hundreds of stores by getting rid of low-priced goods and infusing them with dozens of boutiques featuring designers like Michael Graves, Jonathan Adler, and Sir Terence Conran that would appeal to the new target demographic. The problem with that thinking, predictably, was it turned off existing customers who felt out of place in the alien environment while failing to bring in the monied customers who apparently still viewed the retailer as downmarket. 

Changing that image may have been part of the impetus for Johnson's transformation, but it takes time to establish a connection, and that was a commodity Penney didn't have. In its second-quarter earnings report last year, Penney admitted to some frustration with the reset, noting that of the nearly 12% decline in same-store sales it suffered through during that period, 240 basis points' worth could be laid at the feet of the changes it made to the home department.

Yet Johnson can only be held partially responsible since sales had been steadily falling before he took the reins. Where sales at Penney tumbled a stunning 40% between 2006 and 2013, falling from $19.9 billion to $11.8 billion, they more than doubled at TJX's (TJX 0.32%) HomeGoods from $1.37 billion to just under $3 billion. Macy's saw a 3.6% jump in that time frame, and Kohl's jumped 22%. Johnson's failure was he accelerated the decline.

As the rebirth of the new Penney ran off the rails, it was immediately seen that it had to change course once more, or revert to form. Customers told the retailer they wanted a more traditional furnishings, better price points, and merchandise arranged by category instead of by brand. Considering how early on Penney identified what was wrong, it's surprising that it's only now just getting around to fixing it. 

A story by Reuters last week said Penney was bringing back popular affordable, no-frills brands while reducing space set aside for the designer gear Johnson was enamored with. While not completely gone, they'll be occupying much smaller shelf space as soft goods like bedding and bath products gain greater prominence, taking over areas previously devoted to the designers and to Martha Stewart.

And it's not just the stores getting a reset, but its online presence is also seeing a change. Penney derives half its revenues from its online shop, and it's the online store that's carried the retailer these past few quarters, seeing significant growth and providing revenue that's given Penney a chance to catch its breath.

The turnaround program is still getting its sea legs here, but as J.C. Penney scrubs the memory of its ugly recent past from its stores, investors should feel at home settling in with the department store's recovery.

Rich Duprey and The Motley Fool have no position in any of the stocks mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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