J.C. Penney plots e-commerce comeback

October 8, 2014, 2:30 PM UTC
Inside J.C. Penney Ahead Of Earns & Consumer Confidence Figures
Photograph by Victor J. Blue — Bloomberg/Getty Images

J.C. Penney (JCP) was once an e-commerce trailblazer. And now the department store operator, still recovering from a catastrophic sales decline in 2012, says it has a plan to reclaim that mantle.

The retailer launched into e-commerce almost 20 years ago, well before its main rivals: by 2007 web sales had reached $1.5 billion, way more than Macy’s (M) and Kohl’s (KSS).

But Penney frittered away that edge, the decline self-inflicted. The worst missteps were former CEO Ron Johnson’s focus in 2012 on a failed re-imagining of the 114-year-old retailer into a hipper store, along with the ill-advised separation of Penney’s e-commerce and stores teams, a strategy that flew in the face of every other retailer’s efforts.

The results were breathtaking: e-commerce sales fell by 33% in 2012, and Penney’s $1 billion loss that year left it hamstrung financially at a time the likes of Macy’s, Nordstrom (JWN) and Wal-Mart Stores (WMT) were pouring hundreds of millions into their e-commerce firepower.

Things have improved, both in-stores and online for Penney since CEO Mike Ullman, both Johnson’s predecessor and successor, came back last year and brought back the discounts and in-house brands customers loved. But the retailer has a long way to go to catch rivals.

Success here is crucial. Comparable sales have risen three quarters in a row (online sales alone jumped 16.7% in the second quarter) but analysts expect overall sales to only reach $12.4 billion this fiscal year, well below the all-time high of $19.9 million in 2006. So Penney’s continued recovery hinges on e-commerce, given the chronic drop in foot traffic Penney and others are facing.

Lucky for the retailer, many of the tools it needs are already in place, the legacy of its old catalog business (dropped in 2011) and of a three-year tech overhaul Ullman oversaw in his first stint as CEO, which ended in 2011. (Its recovering home-goods business is helping too—that category generates half the sales on jcp.com.)

“The foundation is here,” Mike Rodgers, the former Saks executive Ullman hired in February to fix Penney’s e-commerce, told Fortune in an exclusive interview. “We’re going to have to invest the money, don’t get me wrong, but it’s not a wholesale re-investment, and tearing everything out and re-doing it.”

He says that if Penney does this well, e-commerce could eventually represent as much as 20% of sales, compared to about 10% now and 15% in 2005.

Getting out of the gate

A good example of how Penney’s e-commerce strength has been hiding in plain sight is a feature Penney has had for years, “Find It Keep It.” The system lets associates with hand-held devices scan an item in store and if the right size or color isn’t in stock, the employee orders it for the customer via its e-commerce site.

Penney is only now really taking advantage of it. A big chunk of its online sales come from the feature and Rodgers thinks that could almost double within four years. And most customers are opting to have orders made via “Find It Keep It” delivered to a store rather than their home, meaning more customer visits, and hence, more shopping.

But the “Find It Keep It” option also reflects what’s next for Penney: the retailer will include it in its shopping app it is launching this week so shoppers can look up for themselves at what’s in stock at any Penney store or e-commerce distribution.

When Rodgers started, his first order of business was to find a way to quickly narrow the gap with rivals in terms of now-standard capabilities for major retailers. Chief among them is the ability to use inventory in stores to help fill online orders. In 2012, Macy’s started using a few hundred of its stores to help fill online orders. Fast forward two years, and Macy’s now uses all of its stores to help web sales. On top of speeding up delivery, that practice makes more profitable use of merchandise that may have ended up in the clearance bin.

In just six months on Rodgers’ watch, some 50 J.C. Penney stores are now able to help fill jcp.com orders and the plan is to have most of the fleet on board by the spring. (Kohl’s is also catching up to Macy’s quickly on that front—as is Target. (TGT))

The same technology used for ship-from-store can support same-day delivery and “order online, pick up in store” for orders assembled in a store, services Penney will start testing next year. (Currently, shoppers can pick up orders in store that were filled at a distribution center before being sent.) Macy’s and Neiman Marcus are currently testing same-day delivery, showing what an arms race this has become.

While Rodgers acknowledged Penney has significant financial constraints (it has $5.3 billion in long term debt), he is still making modest investments on a few essential things.

Chief among them is a new mobile site. Rodgers thinks about half of the traffic on jcp.com will eventually come from mobile. (At Target, it’s about 67% and rising.) And a state-of-the-art mobile site, with videos that enhance a product’s presentations, is an essential tool for converting browsers into shoppers once are in a store, Rodgers added.

After the holiday season, Penney will formulate a detailed three-year road map for its digital strategy. For now, Rodgers’ idea has been to get out of the gate quickly. Just a few months ago jcp.com didn’t have Internet basics, like a list of top selling items. So Rodgers has spent the first half year of his term doing triage. Next comes the harder part.

“I think we are going to catch up quickly—by this time next year we’ll be caught up,” Rodgers predicted.

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