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J.C. Penney woes may persist as Best Buy rebounds

The retailers' roads may be diverging: Best Buy's 1st-quarter results are expected to show a continuing recovery while J.C. Penney's are forecast to be dismal.

May 10, 2013|By Tiffany Hsu, Los Angeles Times
  • In August, Best Buy brought in its third chief executive in six months, French turnaround artist Hubert Joly. Above, Joly celebrates the opening of the Samsung Experience Shop at a Best Buy in New York in April
In August, Best Buy brought in its third chief executive in six months, French… (Neilson Barnard, Getty…)

For a while, J.C. Penney and Best Buy seemed to be doppelgangers.

The two retailers struggled with intensifying competition after years of comfortable stagnation. Beset by Wall Street skepticism and shaky consumer loyalty, each made sweeping attempts at a turnaround. Both removed their controversial chief executives.

But as the companies prepare to reveal first-quarter earnings this month, their roads may be diverging: Best Buy's results are expected to show a continuing recovery while J.C. Penney's are forecast to be dismal.

"Best Buy has probably turned a corner," said Michael J. Hicks, director of the Center for Business and Economic Research at Ball State University in Indiana. "But J.C. Penney's problems are a long way from over."

Best Buy has benefited from the brash moves of a turnaround specialist, while J.C. Penney is still finding its way under new leadership, analysts said.

Consumer perception of Best Buy has rebounded in the last year, hitting record highs twice in the last six months, according to sentiment tracking firm YouGov's BrandIndex. But opinions of J.C. Penney have slid steadily over the same period.

Citing the quiet period before upcoming earnings reports, both retailers declined to comment.

J.C. Penney was once considered a stable, if stodgy, destination. But recent months have been tumultuous.

Chief Executive Ron Johnson was ousted after less than two years. The stock price was halved during his tenure, and revenue plunged more than 20% in each of the last four quarters. In a 12-month period, 43,000 employees lost their jobs.

J.C. Penney said it expects to report $2.6 billion in revenue for its first fiscal quarter, which ended May 4 — a steep 16.4% drop. The Plano, Texas, company will announce results Thursday.

Part of the problem is the economic landscape — the payroll tax increase and persistently high unemployment that experts say disproportionately hit customers of discount department stores.

Still, most analysts blamed the retailer's woes on a bold regime of change under Johnson, who had previously turned Apple's retail spaces into sleek shopper mainstays. But his J.C. Penney tactics — wild swings in pricing, promotion and marketing tactics — misfired.

Compared with rivals such as Macy's and Kohl's, a higher percentage of J.C. Penney shoppers are older, poorer and less able to adapt to rapid and radical retail shifts, according to a report from research company Prosper Business Development.

J.C. Penney "bet the farm" by implementing an "untested, high-risk strategy to turn around its stores," according to a report from Standard & Poor's.

"Success remains uncertain" for J.C. Penney, the analysts said. But change is ongoing.

The heads of real estate, talent, operations and product development, many of them recruited by Johnson, exited. Many of the vacated positions have been reclaimed by the old guard of J.C. Penney managers, including Johnson's predecessor, Myron Ullman, who has returned to the chief executive post.

The company has a new marketing magician, former Coca-Cola Co. executive Sergio Zyman, who has brought in longtime Madison Avenue advertising agency Young & Rubicam. A recent, apologetic commercial features a soothing female voice intoning that "what matters with mistakes is what we learn" before exhorting customers to return to J.C. Penney stores.

The chain has partnered with more upscale brands, such as Pearl by Georgina Chapman of Marchesa, and is building home goods boutiques in 505 of its 1,100 stores.

Activist investor Bill Ackman of Pershing Square Capital Management, who initially recruited Johnson but eventually called his strategy "something very close to a disaster," said last month that the company is poised to restart its newspaper coupon advertising.

And the retailer seems to have attracted another prominent backer: billionaire financier George Soros, who in April took a 7.9% stake in the company.

But according to the S&P analysts, J.C. Penney still has "further operational disruptions" — including declining traffic and revenue and additional markdowns — looming over the next few months.

The company is expected to burn through nearly $1 billion in cash in the first quarter, according to a Citigroup report this week. Last month, the retailer drew $875 million from its $1.85-billion credit line, an amount that at least one analyst called "alarming."

The retailer recently secured a five-year $1.75-billion loan from Goldman Sachs. But Moody's Investors Service downgraded J.C. Penney's rating, arguing that the loan wouldn't solve "longer term performance concerns nor reduce the level of anticipated cash burn … over the next 12 months."

The loan will also "greatly weaken JCP's capital structure at a time when its earnings are at precarious levels," Moody's said.

On the flip side, Best Buy is facing far less skepticism.

A year ago, the electronics seller was embroiled in its own chief executive scandal.

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