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JC Penney Places a Bet on Joe Fresh

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Can a Canadian clothing company that's little-known in the U.S. help revive an American company that's in the doldrums? J.C. Penney seems to think so.

J.C. Penney Company on Friday opened 681 Joe Fresh stores-within-a-store in hopes of reinvigorating its revenues and retail image by attracting new customers without alienating its long-time loyal shoppers.

Industry analysts warn the financial turnaround may take longer and cost more than investors like, however.

On Friday morning, Lara Raskin of Brooklyn was one of the first shoppers at Penney's Manhattan Mall location on 33rd Street in New York City. She works nearby but had never set foot in the store until she came in specifically for the Joe Fresh launch. "I saw this dress online and I wanted to try it on," she said of a sleeveless black-and-white striped dress. "It's $39, and it looks like a good dress."

She's exactly the first-time shopper Penney is trying to lure with the new brands.

"I knew that as I walked in," Raskin said, laughing. "They've got me."

Nearby, Ndeye Seydi of the Bronx had two Joe Fresh patterned blouses in her hand. She's a long-time Penney shopper who said she's noticed the big changes at the store lately and is impressed.

"I love it," she said about the renovation, adding she had no complaints about the prices. She didn't know Joe Fresh was launching Friday, but was glad she found the new shop.

"It's good. I grabbed these already. I like the style. It feels like it's going to be good," Seydi said, touching the fabric.

In their hands, both Seydi and Raskin had $10 coupons, which were being handed out by employees.

Joe Cardamone, the Manhattan store leader, said Joe Fresh is the third store-within-a-store launch within the past two weeks that is geared to attracting new shoppers.

Cardamone said based on discussions with shoppers, they are "big time first timers" in Penney's new sections—Pearl by Georgina Chapman of Marchesa formalwear and Duro Olowu patterened apparel, home and accessories.

He has equally high expectations for Joe Fresh, a popular Canadian brand, which had limited availability in the United States before its Penney deal.

Joe Fresh was created by Club Monaco co-founder Joseph Mimran. "This is going to create so much energy and excitement," Cardamone said of the Joe Fresh offerings.

Penney's Joe Fresh line launched online during the Oscars and in the days after became the store's most popular apparel brand; 61 percent of those shoppers were first-time jcp.com customers, CEO Ron Johnson said during a call with analysts Feb. 27.

The company does not plan to offer more specific numbers relating to shop performance until a full year's worth of sales history is available.

The company has more partnerships lined up, including Michael Graves, Jonathan Adler, Terrance Conran, and a Martha Stewart deal that has been tied up in courts as Macy's asserts it had an exclusive deal with her company. There are currently a dozen brand shops inside Penney stores, including Sephora cosmetics, which were the first in 2006.

On Feb. 27, Penney reported a net loss of $985 million for the fiscal year ended Feb. 2.

Calls have been made for Johnson to resign. Johnson started at Penney at the end of 2011 after 11 years at Apple as the senior vice president of retail.

While upbeat during his earnings call with analysts, Johnson admitted "big mistakes" and laid out a plan to change.

"We worked really hard and tried many things to help the customer understand that she could shop any time on her terms," he said. "But we learned she prefers a sale. At times, she loves a coupon. And always, she needs a reference price. Whether there's a manufacturer suggested price on a branded item, a comparison on a private-label item, or a sale, she needs to feel she added value to her family through the savings she got from being a savvy shopper. So we have brought back sales. We have brought back coupons for our rewards members, although we still call them gifts, and we will offer sales each and every week as we move forward."

Wall Street analysts remain cautious about the execution of the strategy, with almost none recommending the stock as a buy, according to Thomson Reuters data.

"Our view has been and remains that over the longer term the combination of better merchandising and a more cohesive pricing and marketing message together with improved cost controls will lead to a significantly improved profit and return profile for JCP," Oppenheimer & Co. Inc. analyst Brian Nagel wrote in his March 6 report downgrading the stock to perform from outperform. "Near-term risks for JCP are severe, and we believe turning more treacherous for the company."

Although he notes the shops-within-shops strategy is doing well—in the third quarter they were tracking 30 percent ahead of pre-reset levels, he said—lingering concerns include disruptions as the new home-goods areas are installed; an overall decline in foot traffic; and his forecasted cash burn of $900 million in the first quarter and $400 million in the second.

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