J.C. Penney Wants to Remodel Your House

Mar 12, 2017

Who says you can't come home?

J.C. Penney (jcp) is making a big bet on home remodel services—a new arena for the retailer—to help revive what had been a promising turnaround.

In a 100-store test that is likely to presage a rollout to hundreds more stores, the department store this spring will start offering services like bathroom remodeling and blinds installation, and selling and installing awnings, water systems, and smart home technology. It's a major departure for a retailer better known for its apparel and soft home goods like towels and sheets.

The six new service groups, being tested at stores in San Diego, San Antonio and Tampa, are branded together under the "JCPenney Home Services" rubric and will also include heating and cooling systems.

The incursion, coming on the heels of a disappointing holiday season for Penney, will take the retailer straight onto the turf of such well-established rivals in these areas as The Home Depot (hd), Lowe's (low) and Best Buy (bby).

The move could be risky, since customers have never thought of Penney as the go-to retailer to provide these services.

But Penney has its eyes squarely set on a more direct competitor that is a big player in these areas, Sears, with which Penney goes head-to-head in 400 malls. Penney is looking to poach sales and lift its sales per square foot with big ticket items like appliances and HVAC systems. Sears' comparable sales were down 12.3% during the holiday quarter, continuing a long sales hemorrhage. In addition, the recent hhgregg bankruptcy is also freeing up some market opportunity in appliances and services.

"We don't have aspirations to be #1 in market share in appliances, smart home or window installation," J.C. Penney CEO Marvin Ellison told Fortune as he gave us an exclusive tour of the home area at a store in East Elmhurst, N.Y. "We have a large competitor, larger than us, in the mall, that is struggling, and there is market share up for grabs."

Expanding on an appliance revival

Each group of services will have its own display and signage inside Penney's home goods departments at the test stores. A web site, jcpenneyhomeservices.com, will serve as a portal with information as well as the ability to ask for a consultation and set up a home visit with an authorized contractor to get a project estimate.

As with appliances, Penney will not take actual possession of goods, and thus will minimize risk. For instance, in the case of the HVAC systems, Penney is teaming up with supplier Trane, whose products are primarily sold by local distributors. Penney is essentially renting out its space to these suppliers and service providers, and taking a cut of their sales.

These new services are also meant as the logical extension of and complement to Penney's return to appliances last year after 33 years. Together, they're part of an effort to diversify away from apparel, its largest category but a struggling one (Penney expects comparable sales in apparel to fall 5% this year), and to ramp up offerings that will be tough to replicate for purely online stores.

Ellison, who became CEO in August 2015, has made a point of reducing Penney's reliance on apparel sales to focus more on home goods, soft and hard alike. That category generates only 12% or so of Penney's sales, down from 21% just a decade ago.

What's more, sales per square foot in Penney's home goods section lag the store average dramatically—about $100 per square foot per year, compared to the store average of some $170. But by some estimates, the home areas of stores that sell appliances generate anywhere from $600 to $1,000 per square foot. (The appliance departments, which the company says have not required much capital, have now been rolled out to 500 stores, and Penney will add them at 100 more this year.)

Ellison says he wants a piece of the consumer spending that has shifted to home improvement (and away from apparel), and he may be onto something: The Joint Center for Housing Studies of Harvard University recently reported that the residential remodeling market reached an all-time high of $340 billion in 2015, and forecast it would grow 2% a year through 2025.

The bet on home services comes at a tough time for Penney. Its comparable sales were unchanged for the fiscal year that ended in January, and even fell during the holiday season. That was a far cry from the 3% annual pace through 2019 that Ellison and his team promised Wall Street, and a disappointment compared to 2014 and 2015 numbers. Investors have been losing faith too: Shares have fallen by nearly half since hitting a 52-week high of $11.85 nearly a year ago. And Penney recently announced it would close about 140 of its 1,020 stores.

As chronicled last month in a Fortune examination of the travails of department stores, Penney, like rivals Macy's (m) and Kohl's (kss), is grappling with too much overlap and sameness among their offerings, leaving discounting as their only tool to stoke sales.

In addition to the new services, J.C. Penney will be introducing a JCPenney Home Services credit card that will offer higher credit limits than its regular store cards, reflecting the higher overall prices of such projects. The card will be a crucial tool for collecting data on customers, an area where Penney lags Macy's and Kohl's.

The new categories play to Ellison's strengths, given the 13 years he spent a The Home Depot, including some time overseeing its appliances business. But it also harkens back to a time when Penney offered everything for hunting rifles to washing machines and was a national leader in things like window treatments. In its heyday, Penney reportedly provided one-third of U.S. homes their blinds, shades and curtains.

One stat Ellison likes to cite is that 70% of Penney customers are women, and 70% are homeowners. And so he sees a natural fit. He dismissed the idea that big appliances and services would hurt visit frequency, since people don't get a new fridge every year but do freshen up towels sets and get coffee machines more often.

"We are not as concerned that the customer will buy a washer and dryer, then we won't see them again for five years," he said. "Next year it will be a dishwasher." And if his hunch is right, an HVAC system the year after that.

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