A Tale of Two Retailers

 We present below excerpts from analystpresentations by two retailers.  The first is an old, well-known departmentstore chain, and the presentation was made last September, when its long-timeCEO spent an hour or so ruminating about the transformation of his company. The second is more recent—like, this past Friday. And it’s by JC Penney, or “JCP” as its new-ageexecutives insist on calling it—a misguided nod to the company’s stock ticker,which seems to be the one thing those executives understand about the companyand its now-muddied 110-year old relationship with the American consumer…arelationship that won’t be getting any better any time soon so long as itsexecutives insist on referring to a stock ticker that 98% of Penney’s customerswouldn’t recognize if you tattooed it on their foreheads. After all, did Steve Jobs walk around talkabout the great things “AAPL” was creating? Does Coke run ads saying, “Enjoy a KO Today”?  Do Wal-Mart greeters say, “Welcome to WMT” tothe overburdened mothers and their screaming toddlers as they begin the hair-pullingsearch for the day’s bargains? No they do not.  But Penney executives would. Worse still, the company runs newspaper adswith no identification except “JCP” on the page.  AndTV ads with only a “JCP” logo on the screen. It’s no wonder the company’s sales collapsed 21% last quarter. But if you’re expecting ex-Apple retail geniusRon Johnson to bend a little on the “JCP” thing, well that’s not going tohappen, if last Friday’s earnings call was any indication—but we’re gettingahead of ourselves.   The point here is to contrast Penney’s Fridaymorning transcript detailing its current “transformation” with last year’spresentation from another, larger department store—we’ll call it “XYZ” fornow—describing its own “transformation.”  If youcan guess what company “XYZ” is, well, you just might be cynical enough to workon Wall Street.
 Who We Are  XYZ: Ithink, overall, we feel good about our position in the marketplace…I would saythat our transformation over the last five to seven years—I came [here] at a time whenthe turnaround had been complete and we identified the fact that we needed tobe an attraction that people came to us for merchandise, but they also had tohave an experience that was memorable.—9/7/11.

 JCP: We are going to become an entirely newclass of department store that doesn't exist today.  We are going to create a new category that wecall the specialty department store and we think it is going to be profound andlet me tell you about it…—8/10/12
Our Customer Experience
 XYZ: So we focused very much on engagingour associates and having them be the best ambassadors. I'm pleased to say that our customerservice scores have been outstanding and lead recent American Express pollthree years in a row, lead for department stores. I think that is a real testimonialto the effectiveness of our sales associates.—9/7/11.

 JCP: Butwhere we are most excited is how we are going to use RFID to transform thecustomer experience… So next spring we will be rolling out personal check out.So in addition to being able to check out from any employee anywhere, any time,you will be able to check out by yourself in our stores. And we think customersare going to like it and it is going to help our conversion and the customerexperience.—8/10/12
Our TechnologyXYZ:  Wemaintain a $650 million capital expenditure commitment this year primarily ondigital infrastructure as well as remodels, two new stores, and fixturerollouts for our attractions and new initiatives…—9/7/11.

 JCP: From a technology perspective…we have overspent on technology as acompany. Part of that is because we have an extraordinarily complex and anabundant number of applications to run the business. Mike sharedlast January we have 492 unique applications, 88% of them are customized,meaning we have done all this hard work internally to make them unique to usand the challenge of that is 95% of the money we spend every year, $400 millionwas spent to maintain and support outdated applications, which meant we onlygot to spend about 5% on strategic go forward initiatives. If youthink about that, that is $20 million a year out of $400 million going tosomething new to improve the customer experience or ability to manage thebusiness and the balance going to maintain outdated legacy systems. That is aproblem.—8/10/12
Our Promotional Policy XYZ: Well, our pricing and promotion is set ina year in advance, so we don't react on a week-to-week basis, but I will say that weare well priced; as I said, we're the lowest priced anchor in the mall and wecompete head-to-head in the off-mall.—9/7/11.

 JCP: In2011 our Company ran 590 unique promotions and the average item had 20 to 30prices -- different prices during the year. And so I figured going to threetypes of prices would be a lot simpler. A great everyday price, some items at amonth-long better value and then clearance, which we called best price.—8/10/12
Our Home Business XYZ: We've done very well in luggage, inhousewares, in the soft home side. We have a very well developed windowcovering business. I think one-third of all windows in the United States have [our]window coverings. That's a tremendous advantage when people are building homesand remodeling.—9/7/11.

 JCP: And onthe home thing, just so you know, there is going to be a material change inhome. —8/10/12
Our Online Business XYZ: I've said many times we'd been better offif we started from scratch the dot-com than trying to change the locomotive'sengine while we're running down the track. So I believe we've done a good jobof understanding the issue, but it has not been easy, and has not beenaccretive to our monthly comps. Having said that, we've invested heavilybecause we believe it is a strength and that we have a history of being able toship items to a customer's home effectively and the customer looks to us forthat.—9/7/11.

 JCP: Yes,we have not been performing well online. It is one of our big opportunities.Steve Seabolt is here in the front row. Steve took over the online store inMay, we have uncovered a lot of issues -- basic issues. We don't set up ouritems on time. We had items in our shops that weren't set up online. Ournavigation is kind of kludgy at times.—8/10/12
Our Cost Structure XYZ: Our expense program, overall, is reallydesigned to get us to as competitive as possible of a cost structure. Ourmargins have been - are historically high, so we just need to make sure thatour cost structure is competitive to get back to double-digit operating profit.—9/7/11.

 JCP: Expenses-- we have talked a lot about this at $900 million. So in 2011 we had $5.1billion of expense. Our anticipation is that number will be down by over $900million in 2013. And where is that coming from? About $400 million of it iscoming from our stores. It's about $350 million coming out of our home officeand about $150 million coming out of our marketing.—8/10/12
Our WorkforceScheduling System XYZ: Our workforce utilization, our jTime- what we call jTime, which is matching schedules to when the customer is inthe store, that's, again, we've taken out cost. But at the same time, ourcustomer service scores have gone up because we have better staffing when thecustomers actually are in the store and save the expense when obviously thereis less traffic.—9/7/11.

 JCP: So Ithink in many ways our employees are so far ahead of us and they are so tiredof having to go find a piece of paper to figure out when they should work…—8/10/12
Our StoreMerchandising System XYZ: We have a very sophisticated process thatallows us to merchandise every store differently even if they're in the samemarket or in the next community.—9/7/11.

 JCP: So wewill have as many distinct shopping choices in our 130,000 square feet as youwill find in a 1 million square-foot mall, except you won't have to go fromcheck out every time you leave a store, this will be a whole uniqueenvironment…—8/10/12
 Those readers with good memories, or longexperience with JC Penney, or long experience with this virtual column, areprobably already ahead of the game and know that both XYZ and JCP are one andthe same: JC Penney. Or “JCP.” Take your pick.  Either way, willthe new JC Penney “transformation” work any better than the previous one? If it does, Ron Johnson really is agenius.  If it doesn’t, well, at least hetried a whole lot harder than the last crew.

Jeff MatthewsAuthor “Secrets in PlainSight: Business and Investing Secrets of Warren Buffett”(eBooks on Investing,2012)    Available now at Amazon.com
© 2012 NotMakingThisUp,LLC                                    The content contained inthis blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor andclients advised by Mr. Matthews may hold either long or short positions insecurities of various companies discussed in the blog based upon Mr. Matthews’recommendations.  This commentary in noway constitutes investment advice, and should never be relied on in making aninvestment decision, ever.  Also, thisblog is not a solicitation of business by Mr. Matthews: all inquiries will beignored.  And if you think Mr. Matthewsis kidding about that, he is not.  Thecontent herein is intended solely for the entertainment of the reader, and theauthor.