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Should J.C. Penney Be Worried About Doing This?

By Rich Duprey - Apr 5, 2016 at 2:16PM

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J.C. Penney has built its recovery around one particular type of merchandise (clothes); now, the e-commerce giant is dipping a toe into that same segment.

Clothing comprises such a large percentage of J.C. Penney's revenues, as well as the revenues of other retailers, that's entrance into the private-label segment should be a concern to the industry.

J.C. Penney (JCPN.Q) finally got Wall Street to recognize its turnaround is real, but (AMZN -3.21%) may be positioning itself to cause all those gains to unravel. The e-commerce giant has quietly launched a sideline business that, if it catches on, could disrupt the department store chain's recovery, and maybe even take a few others down with it.

A private affair
Amazon is entering the private-label clothing business. The industry site Internet Retailer was able to find trademark applications for six of Amazon's seven clothing brands that date back a year, and an analyst at KeyBanc highlighted their rollout in late February, with a research note indicating the segment's "low barriers to entry, size and significant competitive set make this an attractive category for Amazon."

And that's got to be a concern for J.C. Penney, and, really, other retailers, including Macy's (M -4.14%), Kohl's (KSS -5.39%), and even Wal-Mart (WMT 1.25%), which have been struggling with lackluster results. At least J.C. Penney has a bit of momentum on its side.

When the department store operator reported fiscal 2015 results recently, it was one of the few among its peers that was able to say it had solid gains for the fourth quarter. Net sales were up 2.5%, comparable-store sales were up 4.1%, and gross margins improved 30 basis points to 34.1% of sales.

In contrast, Macy's said sales fell 5% to $8.9 billion, comps on an owned and licensed basis were down 4.3%, and gross margins sagged 290 basis points to 37.4% for the period. Kohl's said sales and comps were essentially flat, while margins were down almost 10 basis points.

A fashion faux pas
The reason Amazon's entry creates risk for these retailers is that apparel sales comprise such large percentages of their total business. Apparel, shoes, and accessories sales account for 82% of Kohl's revenues, 77% at J.C. Penney, and 84% at Macy's.

While Kohl's and Macy's have more dollars at risk than J.C. Penney, because the latter has staked its recovery on the reintroduction of its own private-label brands like St. John's Bay and Ambrielle, it's the one with the most to lose from Amazon's move into the private-label market (though Macy's new off-price Backstage concept store could be at risk as well).

Analysts estimated that Amazon sold some $16 billion worth of apparel in 2015, or about 5% of the industry total, but expect that to grow to as much as $27 billion in 2017, making it the top apparel retailer, ahead of current leader Macy's. Yet by becoming a seller of its own clothing line rather than as a platform for third-party sellers to hawk their wares, Amazon has an additional opportunity to disrupt the category.

Amazon's private-label clothes are said to be priced in the same range as you'd find J.C. Penney's and Kohl's clothes, giving it good leverage to make a significant foray into the field, just as it has in other areas where it's introduced private-label goods, even groceries.

Not every venture the e-commerce leader tries succeeds, but as retailers themselves push the online channel to sustain their business, there seems little reason to believe the biggest Internet retailer can't succeed and profit from this one. And that has to have J.C. Penney worried.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$2,082.00 (-3.21%) $-69.14
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$124.13 (1.25%) $1.53
Macy's, Inc. Stock Quote
Macy's, Inc.
$17.61 (-4.14%) $0.76
Kohl's Corporation Stock Quote
Kohl's Corporation
$36.18 (-5.39%) $-2.06

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

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