JC Penney is still betting on beauty to fuel its turnaround

Key Points
  • "Beauty" for J.C. Penney consists of fine jewelry, its hair salons and Sephora shops.
  • According to CEO Marvin Ellison, Penney's salon customers visit a store twice as often as non-salon customer.
  • Winning shoppers in the beauty category can lead to increased foot traffic and sales in other departments, including apparel.
InStyle salon inside a JC Penney store.
Source: JC Penney

J.C. Penney's investments in beauty aim to steer the company out of a sales slump, as it lags some of its other department store peers heading into 2018.

The company just last month revealed its plans to hire 6,500 stylists for a burgeoning hair salon business across the U.S. Its make-up sales have blossomed due to a unique partnership with Sephora. And a recent overhaul to Penney's jewelry displays in stores is luring more women in to buy diamonds for weddings and other special occasions.

"Beauty" for Penney consists of fine jewelry, its hair salons and Sephora shops. Those three categories were key to its roughly 2 percent same-store sales growth during the holiday quarter.

"One of the key components of our strategy will always be our best-in-class partnership with Sephora," CEO Marvin Ellison said Friday on a call with analysts and investors, after the company issued a bleaker forecast for the current year.

"Our jewelry business is bringing in a newer and younger customer to J.C. Penney and we have aggressive plans for 2018," Ellison added. "And as a reminder, our salon customers visit a store to shop twice as often as non-salon customer."

While Penney's fourth-quarter results were largely disappointing, with shares ending Friday down more than 5 percent, the company said its fine jewelry, hair salon and Sephora businesses all saw comps above the company average during the holiday period.

Penney "is focused on increasing revenue per customer though beauty," Cowen & Co. retail analyst Oliver Chen said. "Bold changes [are] beginning to resonate with customers" across the Plano, Texas-based retailers' roughly 875 stores.

Today, Penney has a Sephora shop situated in roughly 642 of its stores, with plans to add 27 additional Sephora stores in 2018. Its hair salons, which are undergoing branding as "The Salon by InStyle," are in about 750 stores currently. (InStyle is a women's fashion magazine with which Penney partnered in 2015 to make its hair salons more distinct and recognizable by name.)

"Department stores used to do a lot of these businesses," Natalie Lockhart, the vice president of Penney's salon business, told CNBC. "You could get lunch ... and do all these things within the building."

Lockhart said Penney's salon customer visits the department store about nine times every year, and during those trips she will venture into other areas of the store. The company's goal in 2018 is to attract the remainder of Penney's customers who frequent its stores but don't currently use the salons, she explained.

"These departments [within Penney] are high touch and experiential, even in a way a traditional beauty offering is not," she said. Sephora, for example, is giving shoppers makeovers with exclusive brands, such as Fenty Beauty by Rihanna. Penney's hair salons are holding educational events (i.e., how to tie the perfect pony tail), while the department store chain's jewelry counters have become a one-stop shop for brides to be.

"The statistics say, if you have a good experience with your engagement ring, you will stay at that store and buy 90 percent of your other purchases there," said Pam Mortensen, the senior vice president of merchandising for Penney's jewelry business.

"The fine jewelry customer is a very loyal customer," Mortensen added. "They actually cross-shop more than any other department."

That shopping pattern is exactly what Penney aims to take advantage of — to get shoppers in the door for a facial or hair treatment, and then lure her to buy items for her home or for her kids while she's there.

Macy's, Nordstrom and Saks owner Hudson's Bay have each made strides in opening spas, nail salons and the like in some of their more premium stores, but none have made as big a push as Penney with those services to date.

"J.C. Penney is the only retailer that can offer a combination of Sephora, salons and fine jewelry under the same roof, and this unique beauty experience cannot be replicated online and magnifies the importance and relevance of our physical stores," Ellison told analysts and investors.

A Sephora store inside JC Penney.
Source: JC Penney

"I do believe [our beauty selection] is one of the best things we offer," Angela Swanner, the vice president of Sephora inside Penney, told CNBC. "Sephora is always innovating. Being ahead — that's always been the success that Sephora has."

Bringing Sephora into Penney's stores was a decision made by former CEO Mike Ullman in 2006. At the time, Ullman said he wasn't sure how shoppers would react to the new concept, which was rolled out in only a handful of stores to start. But in future quarters, Ullman would go on to call Sephora "the most profitable part" of the store.

"Sephora is a jewel for JCP, helping drive foot traffic into stores and continues to generate impressive comps," according to Cowen & Co.'s Chen.

In turn, with more than 600 Sephora shops today, Penney has started to reorganize inventory to soak up as many sales as possible. It's placing key categories that see similar shopper profiles, like juniors' apparel, next to Sephora, thereby encouraging people to cross-shop.

"We're hopeful the new Women's apparel layout with improved adjacency to Sephora will help stabilize and improve department comps," Chen said.

Outside of beauty, Penney can't cover up the fact that other categories, especially apparel, have suffered as shoppers shift online and increasingly purchase directly from brands. The company's fourth-quarter revenue didn't meet analysts' expectations, as Ellison said Penney would "intensify market share efforts" in appliances, mattresses and furniture.

Its total sales fell 0.6 percent in 2016, according to a 10-K filing, having gained 3 percent in 2015 and 3.4 percent in the year prior. Women's clothing sales have notably dropped as a percentage of Penney's revenue mix. Meanwhile, sales from home, women's accessories (which includes Sephora) and services have increased.

"We believe Home, Appliances, Beauty, and Salon should help JCP become less apparel reliant long-term," Jefferies analyst Randal Konik said. "But continue to see secular declines in mall traffic and the shift to e-Commerce weighing on profitability."

Penney has been investing in its appliances business as department store rival Sears Holdings loses market share and shutters hundreds of stores. Within apparel, the company still has a few bright spots: Penney's plus and big-and-tall sizes have seen tremendous growth of late, and its private-label push has fueled much of that momentum.

Including Friday's losses, J.C. Penney's shares have climbed roughly 17 percent so far this year.