A Memo to J. C. Penney CEO Ron Johnson

Ron Johnson, the newly minted CEO of J. C. Penney, seems to have “blown it” in his first full quarter on the job, said Jim Cramer on CNBC’s “Mad Money.”

JC Penney
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JC Penney

On Tuesday, the retailer reported disappointing results that caused its stock to fall by 21 percent the next day. Same-store sales fell by 18 percent and margins were squeezed. The company ended its dividend payment. Also, it looks as though consumers aren’t taking to Johnson’s new pricing strategy, in which store merchandise prices are cut across the board, eliminating the need for sales or promotions. Traffic declined by 10 percent, suggesting customers miss the coupons.

“Worst of all, though, on the conference call, Johnson seemed to be living in a dream world where everything is still on track, and this horrid quarter was just a blip on the road to success. There was no humility, only hubris,” Cramer said. “In fact, after listening to the call, I heard some people suggest that the guy might be out of his mind.”

While turning around a retail chain is never easy, Cramer said, it can be done. In fact, Cramer thinks Johnson could learn a lot from Pier 1 Imports. Cramer said the largest retailer of decorative home furnishings and gifts in North America has pulled off “one of the greatest comeback stores of our era.”

In 2009, Pier 1 was on the verge of bankruptcy and its stock was trading at just 10 cents a share, Cramer said. Under the leadership of CEO Alex Smith, though, things turned around. Today, Pier 1’s stock is trading at around $16 a share — that’s a 15,900 percent gain from the stock’s bottom.

Smith was successful because he focused on brass tacks, Cramer said. To start, he realized that his company needed better-looking stores and quality merchandise to attract customers. So he tripled the number of buyers and planners, so that the company could stock more attractive products. In turn, it carried fewer big-ticket furniture items and stocked more small-ticket items instead, such as decorative merchandise and seasonal products.

Smith also improved the lay out of his company’s stores. He adopted more open and pyramid-shaped fixtures, which increased the visibility of the merchandise.

Once the company’s stores were turned around, Smith focused on the company’s website. Today, Pier 1 boasts a thriving e-commerce business.

Smith also had to make some hard decisions. He closed underperforming stores and stopped plans to build new locations. He also cut number of full-time employees from 6,100 in 2008 to just 3,500 in 2009. The full-time staff was largely replaced with cheaper, part-time workers, Cramer said.

As a result, Pier 1’s sales-per-square-foot has increased dramatically. It rose from $150 in 2009 to $184 today. Over the last two years, the company has posted impressive same-store sales increases. Last year, its income was up by 49 percent. The company also initiated a 16-cent per share annual dividend.

“It took some time, but Pier 1 is now one of the most successful retailers out there and Alex Smith has credibility to spare,” Cramer said. “This company has been under promising and over delivering for years — the exact opposite of what J. C. Penney did going into the latest quarter. So when Pier 1 came out with some very ambitious long-term targets last month, people actually believed them.”

Cramer thinks Johnson needs to take a page out of the Pier 1 handbook. Like Pier 1, he thinks Johnson should realize that merchandising is everything and give his customers what they want.

“Turning around a big retailer is extremely difficult, but it’s been done before,” Cramer said. “Stop trying to reinvent the wheel and start learning from other companies with successful comebacks, like Pier 1 Imports. Trust me, your shareholders will thank you.”

Call Cramer: 1-800-743-CNBC

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