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Jun
14

No Love Letters for Ron Johnson on his JCP Anniversary

No Love Letters for Ron Johnson on his JCP Anniversary

They say the first year of marriage is the most difficult. Maybe the same can be said for the first year as CEO of a retailer in the midst of a turnaround. With the JCP down 30% and the removal of the dividend since the announcement RJ would take the helm just one year ago, I am guessing the champagne might have to stay on ice for another year. Here is to hoping this relationship has put the worst years behind it.

One of the investors out there who does believe things will get better from here is Bill Ackman of Pershing Square (JCP’s largest shareholder). Notably, he called “the bottom” for same store sales live on CNBC May 29. This was not long after the company announced a jaw dropping 18.9% decline for Q1 at its investor meeting May 15. Since the Q1 news the stock has dropped 27%. While same store sales may not get worse I am not sure why they would get better in the near-term.

So what went so wrong?

The Magician Premium. Lets face it when Ron Johnson took the helm at JCP there were a lot of expectations and perhaps a “magician premium” assigned to the stock. Could Ron do for JCP retail what he did for Apple? We all know turnarounds take time. Certainly they do not happen in just one quarter. And remember, RJ joined JCP officially on Nov. 1. With incredibly high expectations going into the analyst day mid January investors were looking for the magic bullet. Recall Bill Ackman telling CNBC the analyst day would be the most important day for retail in 25 years. What could he possibly say that mid January day with that kind of build up?

Analyst Day not Exactly the Most Important Day in Retail Back in January JCP revealed how it would turnaround the company with a much simpler pricing strategy, new marketing initiatives and store within store concepts. Not exactly revolutionary but a move in the right direction. At the same time RJ outlined $900M of cost cutting opportunities over the next two years. And kudos to Mr Johnson for cutting through some obvious fat in the organization that perhaps was overdue. For details on costs going from fat to flat please see JCP:Day 2 of the “Most Important Day of Retail” http://www.cnbc.com/id/46149658.

Why set any guidance bar ? One of the biggest surprises during the January analyst day was guidance that Non-GAAP EPS would meet or exceed $2.16). Investors cheered the optimistic outlook that was don’t forget back-half weighted (red flag). And lets not forget that cost cuts are all well and good but the sales part of the equation rules at the end of the day. And that part of the story remained fuzzy at best. Setting any earnings “bar” in the midst of a turnaround seems risky at best. And fyi GAAP guidance was later taken off the table but Non-GAAP maintained. We have seen that one before.

29% into turnaround Consumer Tells JCP No Deals No Way. Bottom line is Q1 comp declines of 18.9% were driven by removing the “Deal Drug”. Management admitted underestimating the power of the coupon. While it may be expensive and cumbersome to continually be on the discount train (590 promos ran last year) that is what the consumer knows and more importantly that is what drives traffic (which declined 12% over weekends in Q1). See JCP: Consumers Are Addicted to Deals for more info on Q1 http://www.cnbc.com/id/47440277. Not only did the consumer perceive there were fewer deals but they also simply did not understand the marketing message. Not surprisingly that message is undergoing changes.

The larger than expected same store sales decline was a blow but the bigger issue is execution. Questions remain surrounding the lack of testing of the new strategy vs going full force ahead. In addition with traffic trends the largest issue, did management simply misread their consumer and how difficult is it to undo the damage once the customer has been driven elsewhere?

While I have little doubt that store within store brands in the pipeline (Cynthia Rowley, Lulu Guinness, Betsey Johnson, broader Nike product) will draw in a new, younger consumer only 10 of the 100 shops will be rolled out this year. If comp trends continue their trajectory investors might not be willing to wait.


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