J.C. Penney Co. (JCP) is preparing to make deep price cuts across much of its merchandise, people familiar with the matter said, a significant shift in tactics for Chief Executive Ron Johnson as he tries to draw shoppers back into his stores.
Under the new policy, which kicks off in August, Penney will get rid of monthlong specials that cut prices of select items by 20% to 29% and instead will permanently mark down a large amount of merchandise in stores by similar amounts, the people said.
Under the new policy, which kicks off in August, Penney will get rid of monthlong specials that cut prices of select items by 20% to 29% and instead will permanently mark down a large amount of merchandise in stores by similar amounts, the people said.
The move is an acknowledgment that the department store chain needs deeper price cuts to stem a dive in sales caused by the company ending its ceaseless sales and coupons. The strategy caused revenue in the company's fiscal first quarter to fall by one-fifth. Penney executives expect second-quarter figures to be equally grim, according to people familiar with the matter.
It is also an attempt to clarify for consumers what Penney executives acknowledge has been a confusing pricing strategy. After the change, Penney will offer just two options: everyday low prices and clearance sales on certain items.
The company has repeatedly said it would take years to turn around the chain, but investors aren't showing much patience. Despite a small uptick on Wednesday, the stock is down nearly 40% since the start of the calendar year.
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Penney's suppliers, meanwhile, are complaining that the new strategy has crushed their sales.
A Penney spokeswoman confirmed that the company is eliminating monthlong pricing in August. In presentations, Mr. Johnson has acknowledged that vendors will feel short-term pain as the company reworks its stores and better manages its inventory.
The long-struggling Penney got a jolt when activist investor William Ackman took a large stake in the company and recruited Mr. Johnson to shake up the chain's strategy.
Mr. Johnson's plan for the 1,100-store chain was hailed when he laid out the details in January. The former Apple Inc. retail chief said Penney would eliminate the sales that had caused nearly three-quarters of its products to be sold at discounts of 50% or more, and laid out a vision of a department store full of vendor-branded and themed boutiques.
The first of those boutiques debuted on Monday, when Levi's, Arizona and iJeans by Buffalo showed off their wares at Penney's Manhattan store. Expanding on that idea, Penney on Wednesday announced a partnership with Canadian retailer Joe Fresh to put that brand of boutique in 700 of its department stores.
To speed the buildout of boutiques, Penney is looking to unload $500 million in noncore assets this year, a person familiar with the matter said. The company raised $248 million this week selling an investment in shopping-mall owner Simon Property Group Inc. Other stakes that could be sold include partial ownership positions the company has in a coal-loading facility and a power plant, the person said.
Vendors were hopeful the redesigned stores would boost their business. But Penney's customer traffic slowed and sales sank after the promotions dried up, leading to some caution among vendors considering opening boutiques.
"We need to understand all the risks with Penney going through the transformation before we commit," said a person at one vendor that specializes in apparel basics.
Many vendors have had to accept smaller orders from Penney as fewer people shop, and in some cases, the company has eliminated lines as it makes room for new inventory and brands.
Penney had projected that it will substitute close to half of its inventory as it introduces new lines and revamps its image.
The CEO of one menswear vendor—whose largest account was Penney until this year—said his sales at the department store chain are down nearly 70% from a year ago.
He is sticking it out for now, saying Penney's base of 1,100 stores is too large to ignore.
Another vendor who has suffered a 40% decline in sales with Penney over the past year has been working more closely with Kohl's Corp. and Macy's Inc. to offset the drop in sales.
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On Wednesday, Penney's top 30 vendors—including Adidas, Carter's, Haggar, Hanes and Maidenform—visited the company's Plano, Texas, headquarters for a sneak peak at the future store designs.
Penney says interest in its shops and boutiques from vendors has never been higher and that it hasn't lost any vendors since initiating the changes.
Vendors have also been hurt by Penney's efforts to keep a lid on inventory, a priority for the new management team led by Mr. Johnson.
On a tour of an Ohio distribution center in March, Mr. Johnson's team found boxes covered in dust with enough supply for some products to cover more than two years sales.
Many of the boxes were marked with initials. Over time, as the center's manager walked past them, he would write his initials into the dust with his fingertip.
"There were a lot of boxes with his initials," said Penney Chief Operating Officer Michael Kramer in an interview.
"Most of the old-school retailers have a 'stack it high and watch it fly' approach," Mr. Kramer said. "That is not how you run an effective business."
The new, deeper price cuts reflect the first major adjustment of Mr. Johnson's new pricing policy since it was rolled out in February. That policy set three tiers for pricing: Everyday low prices that were 40% lower than Penney's starting prices last year, "monthlong values" where certain items were put on an even deeper discount for an entire month, and "Best Price Fridays" that were clearance days starting on two Fridays a month.
The cuts that will take place in August will affect up to 20% of the goods in Penney's stores and will leave their prices as much as a third lower than the current everyday low prices, the people said.
In an interview last month, Mr. Johnson conceded that customers were confused about terms it used for its new pricing, but said the company was adamant about not moving back to coupons or sales. LINK
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