Appliances could soon be returning to a J.C. Penney (NYSE:JCP) store near you.
It's been more than three decades since the department store chain carried items like washers, dryers, refrigerators, and ovens. However, J.C. Penney will begin testing appliance sections in 22 pilot stores next month. This is a very sensible move as the company attempts to rebuild its revenue and improve the sales productivity of its stores.
Maximizing each square foot
Retailers try to put every bit of space to its best use in order to maximize each store's sales and earnings. This was the impetus for J.C. Penney's decision to stop selling major appliances in 1983.
J.C. Penney wanted to tailor its product assortment to consumer buying patterns at the malls and regional shopping centers where most J.C. Penney stores were located. That meant a bigger focus on higher-margin categories like apparel and home furnishings. Simply put, J.C. Penney wasn't making enough money selling appliances in 1983 to justify the space devoted to them.
However, much has changed since 1983. Today, J.C. Penney stores have a lot of unproductive space. Sales per square foot hit a post-recession peak in 2011 at $212 but plummeted in the next two years due to a failed strategy shift.
By 2014, J.C. Penney had sales per square foot of just $155. This suggests that the company could potentially generate a lot more sales in each store with a different product mix.
Appliances are a good fit
Today, growing in the appliance market seems like a promising strategy for J.C. Penney. Home Depot (NYSE:HD) and other home improvement retailers have been flourishing lately, as low interest rates and rising home values have driven a surge in remodeling projects.
Home Depot has been posting mid- to high-single digit comparable sales growth in recent quarters. Appliances have been a particularly strong category, posting double-digit comp sales growth. Clearly, there is plenty of consumer demand out there.
J.C. Penney thinks that it can snag a share of appliance sales based on research showing that women tend to be the key decision makers for appliance purchases. More than 70% of J.C. Penney shoppers are women, compared to less than half at Home Depot. Furthermore, the company noticed that many people were already searching for major appliances on its website.
One thing that will ease J.C. Penney's move back into the appliance business is its executive team's industry knowledge. CEO Marvin Ellison was Home Depot's executive vice president of U.S. stores until late 2014. Additionally, J.C. Penney just hired another high-ranking Home Depot executive, Joe McFarland, as its new executive vice president of stores.
How it will work
J.C. Penney will test dedicated appliance showrooms in 22 stores in the San Antonio, San Diego, and Tampa metro areas beginning on Feb. 1. These showrooms will feature major appliance brands. Some of the space for J.C. Penney's new appliance showrooms will come from shrinking these stores' furniture sections.
In the spring, J.C. Penney will begin selling major appliances through its website. Depending on how the pilot stores fare, the company could roll out appliance showrooms to more stores in the future.
Adding appliance showrooms could put some upward pressure on J.C. Penney's capital spending in the short term, due to the cost of reconfiguring the home departments in affected stores. That's important to watch because the company has been trying to rebuild its balance sheet and doesn't have much cash to spare.
However, the upside is tremendous. J.C. Penney clearly has underutilized space in its stores, based on the steep drop-off in sales per square foot since 2011. It needs to find ways to bring customers back to its stores, and appliances are one of the few retail categories seeing strong demand right now. Bringing back appliances just could be the next big turning point in J.C. Penney's turnaround.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.