One of the investors out there who does believe things will get better from here is JCPenney's largest shareholder Bill Ackman of Pershing Square.
Notably, he called“the bottom” for same-store saleslive on CNBC May 29. This was not long after the company announced a jaw dropping 18.9-percent same-store sales decline for first quarter at its investor meeting on May 15. Since the first-quarter news, the stock has dropped 27 percent. While same-store sales may not get worse, I am not sure why they would get better in the near-term.
So what went so wrong?
The Magician Premium. Lets face it, when Johnson took the helm at JCPenney there were a lot of expectations and perhaps a “magician premium” assigned to the stock. Could Johnson do for JCPenney retail what he did for Apple ?
We all know turnarounds take time. Certainly they do not happen in just one quarter. And remember, Johnson joined JCPenney officially on Nov. 1. With incredibly high expectations going into the analyst day in mid-January, investors were looking for the magic bullet. Recall Ackman telling CNBC the analyst day would be the most important day for retail in 25 years. What could he possibly say on that mid-January day that would satisfy investors after that kind of build-up?
Analyst Day—Not Exactly the Most Important Day in Retail. Back in January, JCPenney revealed how it would turn around the company with a much simpler pricing strategy, new marketing initiatives and store-within-a-store concepts. Not exactly revolutionary, but a move in the right direction. At the same time, Johnson outlined $900 million of cost cutting opportunities over the next two years. And kudos to Johnson for cutting through some obvious fat in the organization that perhaps was overdue.
But why set any guidance bar? One of the biggest surprises during the January analyst day was guidance that non-GAAP earnings would meet or exceed $2.16 a share. Investors cheered the optimistic outlook that was, don’t forget, back-half weighted (red flag).
And let's not forget that cost cuts are all well and good, but the sales part of the equation rules at the end of the day. And that part of the story remained fuzzy at best. Setting any earnings “bar” in the midst of a turnaround seems risky at best. And FYI, GAAP guidance was later taken off the table, but non-GAAP maintained. We have seen that one before.
29 Percent Into Turnaround, the Consumer Tells JCPenney: No Deals, No Way. Bottom line is first-quarter same-store sales declines of 18.9 percent were driven by removing the “Deal Drug.”
Management admitted underestimating the power of the coupon. While it may be expensive and cumbersome to continually be on the discount train (590 promos ran last year), that is what the consumer knows — and more importantly that is what drives traffic (which declined 12 percent over weekends during the first quarter).
Not only did the consumer perceive there were fewer deals, but they also simply did not understand the marketing message. Not surprisingly, that message is undergoing changes.
The larger-than-expected same-store sales decline was a blow, but the bigger issue is execution. Questions remain surrounding the lack of testing of the new strategy versus going full-force ahead. In addition with traffic trends the largest issue, did management simply misread their consumer and how difficult is it to undo the damage once the customer has been driven elsewhere?
While I have little doubt that store-within-a-store brands in the pipeline (Cynthia Rowley, Lulu Guinness, Betsey Johnson, broader Nike product) will draw in a new, younger consumer only 10 of the 100 shops will be rolled out this year. If same-store sales trends continue their trajectory, investors might not be willing to wait.
Stacey Widlitz is the President of SW Retail Advisors Inc. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years. Follow Stacey on Twitter @StaceyRetail.