Just when you thought JCP expectations might be low enough? Nope. Not even close.
Turns out the American consumer is addicted to a deal. Problem is the JCP management team did not realize just how much their customer is addicted to the coupon drug. Weaning them off their addiction looks like a bigger challenge than Ron Johnson had originally anticipated.
Comps for Q1 plunged 18.9% and the reported loss was more than 2x expectations. Traffic was the main issue and for the foreseeable future I am not sure why that would change. Traffic declined 10%. High traffic weekends, were simply not high traffic and declined 12% year over year (notably weekends are skewed to the bargain hunting coupon wavers). The weekday traffic was down a kinder 6% but that did not exactly make investors feel any better in the packed out venue where the post mortem earnings meeting took place. The trend in sales throughout the quarter also did not make us feel any better. February declined 21% and improved by 300 basis points for March/April. The company also pointed out conversion rates only declined 100 bps to 21% from 22%, not so bad when consumers may be confused by pricing/signage changes in the stores. Now that is making lemonade out of lemons.
Also turns out the marketing message may not be getting across. While less promotions save the company plenty of dough (repricing store signs was costing $50M per year as there were 590 of them last year) customers are still driven in to stores by a deal. The advertised “best price friday” has not resonated as expected, in fact customers might have thought Friday was the only shot based on the marketing message. As a result the message will be changed to “the big deal starts today”. The company will now highlight the new discounted price vs the everyday low price. Not surprising “basics” (underwear, socks) have suffered. When it comes to fashion consumers are willing to pay up but when it comes to basics pricing rules. While in the end consumers may not be paying more than they used to with every day low pricing the lack of in your face promos is a case of perception is reality.
While JCP tells us the transformation is ahead of schedule the bottom line is sales are not. Cost cutting (and there is plenty of it in this story) is low hanging fruit. Cost opportunities will now exceed the previously announced $900M, although they wont tell us by how much. Problem is cost cutting stories have a shelf life (flashbacks of RadioShack). In the longer term keeping the core consumer AND/OR capturing the new younger consumer is key. While we are early in the transformation game so far JCP changes are alienating the core and not attracting the new. While new brands may change that this will not happen overnight and certainly not this year.
While JCP wowed us with new brands in the pipeline (Cynthia Rowley, Tourneau, Michael Graves, Betsey Johnson, Vivienne Tam, Lulu Guiness, a hip JCP looking brand pipeline, broader Nike product and fancy looking store within stores) the question is how long will investores wait? This transformation will take time and today investors showed their lack of patience.
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