J.C.Penney Must Fix Its Sourcing To Fix Its Business

Walter Loeb

Contributor

Fixing sourcing is among the many challenges J.C.Penney’s CEO Mike Ullman faces. Few retailers have ever decimated their sourcing department and trampled on trusted relationships established in foreign countries, especially the Far East, like J.C.Penney did under Ron Johnson.  Mr. Johnson, the hapless CEO who believed he could change J.C.Penney’s mantra by focusing on famous national brands, ignored the unique strength of J.C.Penney private labels.  These private brands registered billions of dollars in sales and represented fashion and value to the J.C.Penney customer.

These are stressful times for J.C.Penney. Business right now is weaker than expected at the beginning of the year. There are several reasons for the sluggishness. Although it feels like a lame excuse to blame the weather, the fact is it was a very cold and icy winter. The consumer just hunkered down at home and retailers felt the reduced demand as a result.  Of course Internet shopping can fill a void when consumers don’t want to leave their homes, but the impulse purchases that happen when consumers visit stores are reduced. The junior customer was texting and tweeting, but they did not spend much time in stores. Beyond the weather, the late Easter postponed many purchases until the last moment.  For the three days before Easter J.C.Penney advertised “Our Biggest Sales Of The Season” which was matched by Macy’s “Easter Sale.”  It brought customers to stores indicating that there was indeed some pent-up demand for apparel and children’s wear.

Comparisons are also “tough” for J.C.Penney because last year there were many clearance promotions that drove traffic and sales. This year, during several of my shopping forays, I found store traffic to be very light.  I believe the company will report a minimal sales increase for the first quarter of between 2 ½ and 3% (which is slightly below consensus). My sales estimate is below my previous expectations and probably below the company’s original plan.  One must keep in mind that last year this was a period of transition and that the home store, approximately 24% of J.C.Penney’s business, was not yet operational.

Second quarter sales and earnings will be announced on Monday May 19 before the stock market opens. All eyes will be on how much inventory has accumulated due to the below plan sales.  Frankly, I expect the results to be quite satisfactory because of the confidence I have in Ken Mangone, executive vice present of product development, design and sourcing.

Ken and his staff are responsible for restoring the successful private brands that had been the mainstay of the company in pre-Johnson days. Ken joined J.C.Penney in 1977.  The central sourcing group was formed in 1998.  Ken succeeded Peter McGrath who headed the department for a very long time building the private brands that became some of the largest and most successful in the industry. Today Ken’s long standing relationships with leading suppliers are critical to the success of the company.  His job is to ensure that the quality of the product is as good if not better than national brands and that the consumer is motivated to buy because of the value.  Under Mangone’s leadership the in-house design team has grown from 50 specialists to a team of 200 sophisticated technical and talented designers. They are designing power brands that include Arizona, Ambrielle, a.n.a., Worthington, St. John’s Bay, Stafford, Okay Dokey, JCP Home, Royal Velvet, Studio and many more.

Over the years, the time from design to delivery has been cut sharply and J.C.Penney will use this to its advantage.  When I first studied J.C.Penney’s color coordination in the 1970’s and 1980’s there was a strict adherence to a color palette both in fashion departments and the home store. However, at that time it took almost 50 weeks for delivery of the merchandise from overseas sources. Today, some merchandise turns around in just 17 weeks – which is remarkable. As a result there is much more control how inventory flows into stores.

While business was weak for J.C.Penney and the industry, I expect tight inventory control to set the company up for a stronger summer and back to school sales period. I also believe the home store will contribute more to the sales growth.