By Phil Wahba
May 21, 2019

Kohl’s (kss) investors hoping for the retailer’s continued turnaround got a fright on Tuesday when it announced dismal first-quarter results and slashed its 2019 forecasts.

But Kohl’s results—a 3.4% comparable sales decline that was far worse than Wall Street expected—are even scarier to another chain’s shareholders: J.C. Penney (jcp), the struggling department store chain that reported a 5.5% decline in comparable sales for the first quarter, a continued hemorrhaging of its business.

Penney, which has been rebuilding its c-suite since October in the wake of the abrupt departure of its former CEO last summer, has failed to capitalize on the implosion of its now much-smaller rival Sears and strong economy. It’s also fallen perilously behind in the e-commerce wars and on tech, which other retailers now have to better understand customer shopping patterns. What’s more, Penney’s store brands and women’s apparel, core parts of the business, have fallen flat with a large swath of its clientele.

“We must reconnect with our customers on their terms with a deep understanding of how they live, shop and interact with J.C. Penney,” Penney CEO Jill Soltau told investors on a conference call. It’s jarring to read that statement from a 117-year-old company that had bragged in recent years about all its progress on the digital front and customer loyalty. If Penney doesn’t know its customers by now, when will it exactly?

Penney at this point in time is essentially a broken company, one that is handcuffed by debt as it attempts its umpteenth turnaround of the last decade, something made harder by its high exposure to the problems buffeting mid-to-low-quality malls, home to most of its stores.

Kohl’s, in contrast, has a strong balance sheet, operates most of stores away from malls, has been shrinking many stores to be more productive with their space, benefits from state-of-the-art tech and e-commerce, and has lined up many interesting partnerships in the last few years. These include selling Under Armour and, in a pilot that will be expanded to all of its 1,150 this year, handling returns of Amazon.com orders within its stores.

Other assets that have helped Kohl’s in the last two years: a highly popular loyalty program giving deep insights into customer behavior and a sophisticated inventory management, which lets it quickly concentrate merchandise in areas of most demand and keep low inventory in stores, the better to avoid having to sell it at clearance.

And yet Kohl’s floundered, too, in the first quarter, offering Wall Street an abrupt reversal in what had been solid, if modest, sales gains in the last year. (The company blamed factors like the weather.) But if Kohl’s, with everything going for it, is stumbling (CEO Michelle Gass told analysts Kohl’s would return to growth in the second half of the year), what are the prospects for Penney?

Soltau, who had been CEO of JoAnn Stores, has spent the first few months of her tenure filling top slots, which she has achieved, naming finance, merchandising, and customer chiefs in the last few months. And she said Wall Street should expect a turnaround plan to be unveiled later this year.

But her predecessor, Marvin Ellison (now Lowe’s CEO), had spent years trying to fix Penney’s e-commerce and tech, and close 140 stores (it still has 860). And his attempts to launch successful store brands of the kind that have propelled Target’s sales fell flat.

What’s more, Penney is so far behind the likes of Macy’s and Kohl’s (not to mention Amazon)—from tech to the state of its increasingly cluttered and dated stores—it’s hard to see what new Solatu can try to get things back on track once and for all. The company is “focused on re-establishing the fundamentals of retail” as one executive put it. Well, its rivals are way past “fundamentals.”

Soltau herself suggested improvements in Penney’s performance were not nigh in coming, referring to her previous turnaround experience in her career. “Sometimes, the business can get a little bit worse before it gets better,” she said on the call.

She had better hurry up, especially should a recession strike. A retailer, whose comparable sales declines have deepened and has racked up $3.5 billion in net losses from operations since 2010, has little time to spare.

 

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