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JC Penney Co.'s new sales strategy has yet to produce returns

These days, JC Penney is on the defensive.

The 110-year-old retailer is orchestrating an ambitious rebranding strategy that is transforming its 1,100 locations across the country into “JCP” stores. Frequent sales of 60 to 70 percent off are gone and so are most coupons. The new JCP offers what it calls “fair and square” pricing, where items at the store are discounted an average of 40 percent without promotion.

But the strategy hasn’t paid off yet. Revenues plunged $1.1 billion or 27 percentin the third quarter and sales at its stores opened at least a year have sunk to a level worse than JCP’s performance during the recession.

“It reminds me of a gentleman that wants to drive a pickup truck over a cliff. You know, driving over a cliff might be fun, but you ultimately crash and die and that’s exactly what they’re doing to that company,” said Britt Beemer, CEO of Charleston, S.C.-based America’s Research Group, which tracks consumer spending habits. “They’re destroying Penney’s with every week without a promotion.”

Like many retailers, JCP is trying to gain an audience with younger shoppers and is working on differentiating itself from the rest of the pack. The retail business is getting ever more competitive, with online stores selling items for less and the recession causing consumers to cut back on spending.

The JCP store in Culver City ranks 14th in company store sales volume nationwide. Sales are down as the rebranding takes hold, but Culver City store leader Matt Taylor has faith that consumers will come to embrace the new JCP.

“It takes a while to get this transformation rolling,” Taylor said. “2013, I think you’re going to see a different JC Penney. I think you’re going to see an upswing in sales.”

Taylor beamed with pride when he explained JCP’s new “shops” — sections of the store dedicated to certain brands. For example, in the past, consumers may have wandered the store to find matching Levi’s shirts and pants. Now consumers can go to the Levi’s shop at JCP and find all those items in one spot.

Taylor said the strategy is working so far, and next year 40 percent of the store will be organized this way. Sales for items at the branded shops are doing better than other products located elsewhere in the store. The shops are also giving people more walking room. Taylor said his staff removed at least 300 racks from the store floor. The store also cleared away some of its cash registers and increased the amount of handheld devices that will allow sales associates to ring up purchases directly on the sales floor.

“It’s less cluttered now,” Taylor said. “We’re making it easier for our customers to find what they’re looking for.”

But it's unclear whether shoppers will flock to the store to experience the new layout.

Beemer said JCP is making a big mistake, and he thinks if the company continues its current rebranding strategy with the same results by March, it could doom the business. About 76 percent of consumers want to buy things on sale, Beemer said. That's what drives them to go to the store and JC Penney shoppers have been trained for years to wait for sales and coupons, he added.

“You’re literally throwing your customer base overboard,” Beemer said, adding that JC Penney shoppers are now going to retailers like Kohl’s and Stein Mart instead.

Just ask Macy’s. Seven years ago as it finished its acquisition of May Co., Macy's was moving forward with a plan to reduce the number of coupons in its newspaper ads. But May Co. shoppers were used to coupons. Without them, they cut down on their shopping visits. With customer traffic down, Macy’s was forced to increase the coupons.

“Not only did customers like coupons, but it became the trigger for them to shop,” said Macy’s spokesman Jim Sluzewski.

But some JCP shoppers said they are happier without the coupons.

“I might clip out the coupon and forget to give it to the cashier once I got to the store,” said Bonnie Myers, 70, who was shopping for a winter coat for her boyfriend and a watch for herself at the Culver City store.

Paul Swinand, a Morningstar equity analyst, said he believes that JCP’s strategy could work. He said JC Penney’s constant discounting wasn’t sustainable. The chain used to have about 600 sales a year, he said.

“You can lap the promotion with a bigger promotion, but if you’re already 60 to 80 percent off, what are you going to do next year? Have 90 percent off?” Swinand said.

The new strategy will help attract younger shoppers and more brands to JCP, which will differentiate it from other retailers, he added. Swinand said it’s important to reach out to younger consumers, because that’s where the future sales growth will be.

“If you don’t evolve with the population, your customers are going to be spending less and less as they get older and older,” Swinand said. “Young people spend more especially when they start new households and have kids.”

Leading JCP’s sales strategy is CEO Ron Johnson, who used to be Apple’s senior vice president of retail. Before that, he was vice president of merchandising at Target, and was instrumental in helping the discounter become a place where big brands like Michael Graves could successfully sell their products.

Right now, JCP investors aren’t feeling so confident about the Plano, Texas-based company. The stock closed at $20.80 a share – less than half its value a year ago – on the New York Stock Exchange on Friday. Swinand recommends that investors buy the stock now because it can only go up from here.

“You got to hold your nose. It’s not for everybody,” Swinand said. “You might have to take another punch in the face at the next announcement, but typically in Wall Street when everybody is in agreement that something is bad, it’s actually priced in.”

Meanwhile, store leader Matt Taylor said he believes that once shoppers become familiar with JCP, they will shop there.

“If the merchandise is right, if the pricing is right, they will shop with us with confidence,” Taylor predicted.