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Is J.C. Penney About to Make a Fashion Faux Pas?

By Rich Duprey - Sep 17, 2015 at 12:00PM

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The department store chain has made quick work of recovering its financial balance by sticking to the basics, but it may be about to go off the rails once more.

Things have been going so well for J.C. Penney that its decision to offer a fast-fashion brand risks upsetting its recovery.

Just like restaurants jumping onto the fast-casual dining trend, clothing retailers are discovering the sustainable growth achieved by their fast-fashion competitors and deciding they, too, can join the fray.

From H&M and Zara to Century 21 and rue21, retailers on the cutting edge of disposable fashion have achieved remarkable success by quickly taking fresh-off-the-runway looks and transforming them into mass-market versions at much lower cost. It seems to be such an easy recipe to replicate and spur new sales growth that even stodgier department-store chain J.C. Penney (JCPN.Q) is jumping on the bandwagon.

The retailer is launching a new brand called Belle + Sky, but the decision could cause its turnaround efforts to unravel.

Fickle tastes in clothes
Fashion styles change fast, but fast-fashion puts the phenomenon into hyperdrive. Manufacturers know the next trend is only the next catwalk away, so they make these clothes as quickly and as cheaply as possible. Customers know too they're not buying styles (or materials) that will last, but the dramatically lower cost of an outfit makes having to make repeat purchases more frequently a worthwhile trade-off.

Because of the success achieved by fast-fashion's leaders, more traditional retailers think they can replicate the model too. Gap (GPS 8.86%) says it's looking to juice sales at its namesake stores by transforming them into fashion forward outlets. It seems to be working well enough at its Old Navy store, where comparable sales rose 3% in the latest quarter compared with a 6% decline at Gap (and a 4% drop at Banana Republic), such that the jeans company is looking to expand the concept across the entire company.

Yet that's not without risk. Abercrombie & Fitch (ANF 4.62%) similarly sought to ride the fast-fashion wave by turning its Hollister brand into a trendy outlet, but same-store sales tumbled 6% at the concept last quarter, and even though Sears Holdings (SHLDQ) -- Sears! -- said that it, too, wanted to dabble in fast-fashion, it's possible the trend has already jumped the shark. Forever 21 is looking to reduce its footprint, shrinking the size of its mall-based stores as comparable-store sales over the past year have turned negative.

So it's possible J.C. Penney is getting in just as the bottom is about to drop out, but there are also special risks associated with the retailer's announcement that it also wanted to test a new fast-fashion brand.

We've been down this road before
The department-store chain is still getting back on an even financial footing. After former CEO Ron Johnson initiated a number of new changes to drag the old-line retailer into the 21st century, the retailer's customers fled the store in droves and the company was brought to the brink of financial ruin.

Will a customer that shops for clothes like these also shop trendier threads too? J.C. Penney seems to think so. 

While the retailer's sales had been falling before Johnson's appointment to the top post, their decline accelerated after he began the overhaul as he sought to attract today's younger consumer. What was left out of the equation was that J.C. Penney's core customer was apparently as stodgy as the old-line department store.

Its customers wanted doorbuster sales. They actually liked the in-house brands like St. John's Bay, J. Ferrar, and Ambrielle. And they wanted to go to a cash register to check out instead of searching for an employee with a tablet who could ring up their order.

When Johnson was ousted and new management installed, virtually all his changes were undone, and its customers returned in droves. As a result, sales have risen, operating losses have narrowed, and it anticipates achieving some $1.2 billion in EBITDA by 2017.

Going nowhere fast?
The decision to launch a fast-fashion line could upset that achievement, as J.C. Penney once again panders to a customer not necessarily in its wheelhouse. Moreover, one which fast-fashion brings with it a whole new set of issues as it's a completely new way of running an apparel business. It requires flawless, efficient logistics to keep the latest styles on the racks, and it means attracting fickle teens to shop its stores. J.C. Penney's track record doing that has been less than stellar, and few teens are likely to be convinced it is a cool, hip place to shop.

Because it's only a single private-label brand, and not a complete remodel like Abecrombie and Gap are proposing, J.C. Penney's risk is seemingly limited but it does suggest the retailer still wants to tinker with its successful turnaround efforts, and that alone may be the biggest hurdle it has to surmount.

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
McDonald's Corporation Stock Quote
McDonald's Corporation
$247.90 (1.77%) $4.32
The Gap, Inc. Stock Quote
The Gap, Inc.
$9.46 (8.86%) $0.77
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
$19.47 (4.62%) $0.86
H & M Hennes & Mauritz AB (publ) Stock Quote
H & M Hennes & Mauritz AB (publ)
$2.42 (2.54%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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