Retail giant J.C. Penney reported some fairly grim results today. Fiscal first-quarter sales fell a remarkable 20%, the company lost $163 million and it suspended its dividend.
The news apparently caught many investors by surprise; the stock dropped more than 10%.
But if you’ve been following J.C. Penney the results are quite predictable. There is nothing surprising in the numbers.
In January this year J.C. Penney announced a major strategic shift. The company was moving away from its traditional emphasis on deep sales and embracing everyday low pricing. So J.C. Penney rolled back prices dramatically and scaled back the sales.
The move makes a lot of sense because J.C. Penney had become totally dependent on deep discounts. In a remarkable admission, the company said that it sold almost nothing at full price. Everything was on discount. This isn’t a healthy way to run a business.
The problem is that in the short run the promotion shift will lead to dismal results. Many people love sales; they find it simply thrilling to get a great deal. When Penney stops running sales, these people will leave; getting a reasonable price on a nice blouse isn’t anywhere near as exciting as getting it for 78% off. The deal shoppers are moving on.
And J.C. Penney doesn’t yet have a proposition to replace the losses with new shoppers. The company’s recent advertising is uninspired. It is pretty clear J.C. Penney is still work on the message.
So what happens?
Sales slump and losses pile-up. And the trends will continue as the deep discount buyers depart and J.C. Penney rebuilds its brand.
The only real question is whether the company will have the conviction, patience and financial resources to stick with the plan.