Photograph by Matthew Staver/Bloomberg/Getty
By Phil Wahba
August 14, 2015

J.C. Penney (JCP) reported good results for its second fiscal quarter on Friday, besting its main rivals Macy’s (M), Kohl’s (KSS), Dillard’s (DDS), and Sears (SHLD) in sales growth.

That continued momentum is the result of Penney’s enormous efforts to undo the damage wrought by former CEO Ron Johnson’s failed attempt at turning the department stores into a hip retailer in 2012 and 2013. In the two years since Johnson left, Penney has begun to recover from a 30% revenue drop by bringing back popular house brands like St. John’s Bay, reconfiguring its home goods sections and assortment, and re-integrating its stores and e-commerce teams.

Those efforts helped generate a 4.1% increase in comparable sales for the second fiscal quarter of 2015 (at Macy’s, comparable sales fell 2.1%), and lift gross margins by 1 percentage point to 37% of sales as Penney had to sell fewer items at clearance prices. A lot of that had to do with improvements in its jcp.com business, where growth sped up compared to the first quarter.

But in his first conference with Wall Street analysts as Penney’s CEO, former Home Depot executive Marvin Ellison made it clear there is a lot of work to do on the e-commerce front to get Penney, whose sales are still 25% below pre-Johnson era levels, back to what he called “a world-class retailer.” To catch up, Penney’s investments in tech will amount to 29% of its capital expense budget this year, compared to 22% historically.

“We are admittedly behind the retail industry in our omni-channel strategy,” Ellison said on the call, using the industry term for the integration of stores and digital commerce.

A case in point: Penney will only get around to giving shoppers the option to pick up an order made online in any store next year, months behind Kohl’s and years behind Macy’s. Ellison said it’s not enough to recreate the pre-2011 Penney given the major advances in e-tailing.

Here is what Ellison, who took the reins on Aug. 1 after co-piloting the retailer with former CEO Mike Ullman for nine months, has planned for the retailer on the e-commerce, tech and other fronts.

More assortment online

One of Ellison’s recent hires, former Home Depot executive Michael Amend, has been tasked with working with Penney’s merchants to “aggressively” expand the assortment on jcp.com. While the website does a good job of showcasing what customers can find in stores, “you see very few unique items that are online-only,” Ellison said. That strategy echoes that of Walmart (WMT), which is also vastly expanding what it sells online.

Reducing the number of out-of-stocks

Penney’s revenues have been hurt by having out of stock goods, depriving it of sales and disappointing customers. This calls for better inventory management and coordination between e-commerce and in-store operations. If a customer at a store in Maine likes a sweater that is out of stock, jcp.com or a clerk in that store should know that a location in Pennsylvania has it in stock and can send it to the customer. It may sound basic, and many retailers already do this, but it is crucial to lifting Penney’s sales.

Using data to figure out what customers want

Ellison recognized that there are a lot of searches on jcp.com that fail to lead to a sale. With better analytics, Penney is now gathering data on those failed searches and out-of-stock scenarios to get a better handle on what shoppers are looking for and to improve demand forecasting. The retailer will not likely benefit from these efforts until next year, when it has collected enough data.

Analytics more broadly will help Penney with pricing, which it now does largely without detailed data, raising the risks of mis-pricing items—either leaving money on the table for items it could price higher, or overcharging for items.

Improving logistics

Penney is only now starting to reap the benefits of an investment it made years ago in Oracle database systems, something it expects will help its teams better plan when merchandise gets to stores and distribution centers, improve its buying process, and adapt inventory to a given store’s needs. That in turn should lead to fewer markdowns at stores.

A vastly improved loyalty program

With Macy’s now part of a multi-company rewards program, and Kohl’s new program a runaway success, Penney is under the gun to reap the same benefits from a closer understanding of a customers’ interests. Ellison wants to use the data Penney is collecting to personalize ads and communicate more directly with shoppers.

As he points out, Penney is back to having 87 million active customers, the same number as before the Ron Johnson debacle. But with sales still well below where they used to be, it’s clear the retailer could stand to squeeze more out of each shopper.

“The real litmus test is getting more people into the store and get them to buy more frequently,” says ITG Investment Research analyst John Tomlinson.

And that’s ultimately what all of Penney’s initiatives are designed to achieve.

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