January 25, 2012 / 7:13 PM / 6 years ago

Penney clears out clearance with new pricing plan

NEW YORK (Reuters) - J.C. Penney Co Inc JCP.N is doing away with deep discounts in favor of offering shoppers simpler pricing, and plans to carve up its stores into about 100 shops featuring specific brands, the department store’s new executive team said on Wednesday.

The store changes will take until 2015 to complete. Shares of J.C. Penney fell 3 percent.

The store revamp and pricing plan were the first strategic announcements from Ron Johnson, who in November was hired away from Apple Inc AAPL.O -- after building that company’s retail chain -- to turn around the 110-year department store chain as its chief executive.

In many ways, Penney’s shift harkens back to the department stores of decades ago, when individual brands were highlighted within a larger space. The plan also emulates some of the success Nordstrom Inc JWN.N has seen by offering a limited number of discounts rather than a constant churn of price cuts.

Penney’s sales performance in recent years has lagged that of Macy’s Inc M.N and Kohl’s Corp KSS.N. The chain has confused shoppers by focusing on discounts and promotions, CEO Ron Johnson said at an event in New York, where the chain introduced its new strategy.

“The customer knows the right price,” Johnson said. “To think you can fool a customer is kind of crazy.”

Penney will revamp its more than 1,100 locations over the next several years, bringing in brands like home goods icon Martha Stewart and fashion designer Nanette Lepore. The redesign appears necessary, especially as most of its stores are old and Macy’s and Kohl’s have accelerated their store facelifts.

Wall Street is waiting to see if the magic led by Johnson at Apple’s stores, known for their streamlined look and industry-leading sales per square foot, can be recreated in a department store chain that has lost its edge.

The company will offer financial details in a meeting with Wall Street analysts on Thursday.

“I am betting on the jockey, not the horse. I think Ron Johnson can make it happen,” said Mervin Morris of Morris Management Company. “He has taken on a very big task.”

Shares of Penney were down 3 percent at $33.54 in heavy trading on the New York Stock Exchange.

Goldman Sachs said it expects Thursday’s presentation to be “more sobering” than Wednesday’s flashy show, as the company will likely give conservative financial guidance. The turnaround may already be priced into Penney shares, which trade at a higher valuation than its peers, it added.

There is a risk that tomorrow’s stock move could be much bigger than the rise or fall of 5 percent that is priced into options, Goldman said.

SALES SHAKEUP

In the past, only 0.2 percent of Penney’s sales came from full-price items and its 590 unique promotions a year were confusing and failed to draw shoppers, Johnson said.

Some 72 percent of Penney revenue last year came from items discounted at least 50 percent.

“At some point, you seem desperate,” he said.

Starting February 1, Penney will offer three types of pricing -- everyday pricing, best prices and month-long deals -- and do away with clearance.

Johnson praised the upscale Nordstrom chain for holding five sales a year, at times shoppers knew to expect them, rather than the constant din of bargains offered by Penney. It’s pointless to mark up prices only to then mark them down, he said.

Discounts will remain at Penney in a different format. Every first and third Friday of the month it will clear out some merchandise by putting blue tags on items rather than putting them in a discount bin with signs proclaiming a percentage off.

Beginning next week, Penney will do away with circulars in favor of a monthly 96-page booklet of select merchandise, with stores being reorganized every month.

Each location will start adding two unique stores per month in August, with the project completed during 2015.

One of the brands being promoted at the store will be Martha Stewart. Macy’s recently sued Martha Stewart Living Omnimedia Inc MSO.N, accusing the company of breach of contract for entering into an agreement to sell certain products at Penney stores.

Paying close attention to the new strategy is Penney board member William Ackman, whose Pershing Square Capital Management is the department store’s biggest shareholder. Pershing Square holds 18.1 percent of Penney’s shares and, under a deal with the company, can own as much as 26.1 percent.

Ackman, who pushed to recruit Johnson last year, sat near the front of the crowd on Wednesday.

When asked by Reuters if the changes laid out by Johnson were what he had in mind when he invested in Penney, Ackman nodded yes, saying: “These guys are incredible.”

Penney is also bringing out a new advertising campaign. One television commercial features talk show host Ellen DeGeneres and another ad mocks the company’s old discounting approach with a humorous take on an auctioneer.

The ads state: “No more pricing games. Just great prices from the start.”

In a full page ad in the Wall Street Journal on Wednesday, Penney said: “We’re not interested in being the biggest store or the flashiest store. We want to be your favorite store.”

Reporting By Phil Wahba in New York, additional reporting by Doris Frankel in Chicago. Writing by Jessica Wohl in Chicago. Editing by Derek Caney and Gunna Dickson

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