NEW YORK (Reuters) - J.C. Penney Co Inc (JCP.N) is changing everything from its pricing strategy and store layout to its exclusive merchandise lines as the department store chain seeks to jettison the wide margin-sapping discounts that failed to bring in customers.
The physical revamp and pricing plan were the first strategic salvos from Chief Executive Ron Johnson, who was hired away from Apple Inc (AAPL.O) in November, after building that company’s retail chain.
Investors were uncertain about the planned changes, sending Penney’s shares as much as 3.4 percent lower before they closed at $34.20, down 1.2 percent on the day.
Penney has lost ground in recent years to rivals Macy’s Inc (M.N) and Kohl’s Corp (KSS.N), and lags them by a large margin in sales per square foot. Penney has been hurt by a reliance on price-cutting that never translated into consistent sales gains.
Penney shares have gained more than 6 percent since October 31, the day before Johnson took over as CEO.
Starting next week, Penney will begin to do away with the deep discounts that are synonymous with its name, in favor of offering shoppers simpler, more predictable pricing.
Johnson said new pricing can work only if it comes with new product and new presentation. He recognized there was a risk of confusing shoppers used to Penney’s deep discounts.
“There will clearly be a learning period for the customer,” Johnson told Reuters in an interview.
Beginning in August, the retailer plans to carve each of its stores into about 100 sleek, neat sections featuring specific brands or product categories, Penney’s executives said on Wednesday. It will start adding two separate shops per month at each store.
Penney’s 1,100 U.S. stores will bring in brands including home goods icon Martha Stewart and fashion designer Nanette Lepore. More exclusives are coming. The retailer has already had success with its Sephora cosmetics boutiques, as well as its MNG by Mango fashion stores.
Penney President Michael Francis said the retailer would shed a few underperforming brands but did not elaborate. He also said brands including St. John’s Bay will get their own boutiques.
The new strategy comes as rivals are moving in the same direction. Macy’s is creating upscale boutiques at its flagship, while Target Corp (TGT.N), where Johnson was a merchant for 15 years before joining Apple, two weeks ago said it would host small shops in stores with trendy brands.
Penney will spend $80 million a month on an advertising campaign to inform shoppers of the changes. The campaign will be heavily focused on television and will feature comedian Ellen DeGeneres.
The retailer is also going to circulate a monthly booklet highlighting each month’s specials, printed on high-quality paper similar to a J. Crew catalog.
The 110-year-old department store chain plans to announce financial details of the overhaul, which will take until 2015 to complete, on Thursday.
Some 72 percent of Penney’s $17.8 billion revenue last year came from items discounted at least 50 percent. Johnson said Penney’s reliance on discounts may have gotten out of hand. “At some point, you seem desperate,” he said.
Discounts will remain at Penney, but in a different form.
Every first and third Friday of the month it will clear out some merchandise by putting blue tags on certain items. The old practice, by contrast, was to throw items into a discount bin with signs proclaiming “70 percent off.”
Johnson told a news conference on Wednesday that in the past 10 years, discounts have risen to 60 percent off on average from 38 percent, while the average amount of money that ends up in Penney’s cash registers has fallen.
“The customer knows the right price,” Johnson said. “To think you can fool a customer is kind of crazy.”
Wall Street is waiting to see if Johnson can replicate the success he enjoyed at Apple.
Goldman Sachs said it expects Thursday’s presentation to be “more sobering” than Wednesday’s news conference, as the company will likely give conservative financial guidance. The turnaround may already be priced in to Penney shares, which trade at a higher valuation than its peers, it added.
Paying close attention to the new strategy is Penney board member William Ackman, whose Pershing Square Capital Management is the department store’s biggest shareholder. Pershing Square holds 18.1 percent of Penney’s shares and, under a deal with the company, can own as much as 26.1 percent.
There were some early signs that customers liked the new pricing as it showed up in some test-market stores.
Tricia Lewis, 44, a fashion blogger from Queens, New York, was shopping at a Penney store in Manhattan on Wednesday and noticed a pair of “I heart Ronson” leggings for $10.
“That’s a really fair price on leggings. Now, I wouldn’t wait for it to go on sale,” Lewis said.
Some Wall Street analysts have called for Penney to close some of its stores, but Johnson dismissed that notion.
“If we’re going to be America’s favorite store, we need to work in small towns, big cities and suburbs,” he said.
Reporting By Phil Wahba and Dhanya Skariachan in New York, additional reporting by Doris Frankel in Chicago. Writing by Jessica Wohl in Chicago. Editing by Derek Caney, Gunna Dickson and Matthew Lewis