The Associated Press May 15, 2012, 4:40PM ET

Penney reports loss and plummeting sales in 1Q

J.C. Penney on Tuesday reported a larger-than-expected loss in the first quarter largely because customers were turned off by the retailer's new plan to get rid of heavy discounting periodically throughout the year in favor of everyday low pricing.

The idea of the strategy, which was rolled out on Feb. 1, is to discourage shoppers from waiting for the nearly 600 sales Penney used to offer each year. But the move has backfired: It seems many faithful Penny customers have stopped shopping altogether.

The company, which is based in Plano, Texas, lost $163 million, or 75 cents a share, in the three months ended April 28. That's down from a profit of $64 million, or 28 cents a share, in the year-ago period.

Revenue dropped 20 percent to $3.15 billion, below the penny loss on revenue of $3.45 billion Wall Street had expected. Revenue at stores opened at least a year -- a figure the retail industry uses to measure a company's health -- fell 18.9 percent. That's much steeper drop than the 11.4 percent drop analysts polled by FactSet had been forecasting.

"Consumers want deals, and they're willing to wait for them," said C. Britt Beemer, chairman of America's Research Group, a consumer research firm. "When you train customers to shop at big discounts, that customer is not going to change."

Penney's disappointing results are the first glimpse into how the bold pricing strategy is playing out with customers. They underscore how difficult it is for a company to fundamentally change the way customers behave. Industry watchers Penney's has an uphill battle in attempting to shift the mindset of U.S. shoppers, who increasingly have become accustomed to and spoiled by fat discounts during the economic downturn.

The pricing plan is the riskiest move yet by new CEO Ron Johnson -- a former Apple Inc. executive who started in November -- to transform every aspect of the department-store chain from the brands it carries to the way it positions them in stores. Penney has said for months that it will take time for the pricing plan to work, but the poor results put more pressure on Johnson to convince investors that he's on the right path.

Investors had put a lot of faith in Johnson, who was the mastermind behind Apple's successful retail stores and who also spearheaded the cheap chic strategy at Target in the 1990s. But they've soured on the plan recently.

Penney shares soared 24 percent to about $43 after Johnson laid out his pricing strategy in late January. But since the middle of February -- after the plan was rolled out in stores-- investors have become increasingly nervous, sending shares back down to trade around $34. After the company reported its disappointing first-quarter results after the markets closed, Penney's shares fell 12 percent to $29.30 in after-hours trading.

Wall Street analysts and others in the retail industry are carefully watching how Penney fares. If the new pricing takes off, other chains could follow. Indeed, many clothing chains have been trying to figure out how to wean shoppers off of the big discounts that became commonplace during the Great Recession.

"This is an ambitious task. If Penney succeeds, (stores) will have to decide whether they'll follow," said Chris Donnelly, managing director of Accenture's retail practice. "If not, they'll have to make adjustments to their promotional pricing to compete."

Analysts say part of the problem with the pricing plan is that it hasn't been communicated well to consumers. As part of the plan, Penney got rid of its hundreds of sales and rolled out a three-tier pricing strategy: everyday prices that are about 40 percent less than what they were a year ago, one monthlong sale each month on select items and clearance events during the first and third Friday of each month. The company also hired talk show host Ellen DeGeneres to star in TV ads that aim to educate shoppers on the new switch.

But some observers say the ads and other marketing messages, which mimic rival Target's whimsical style, have been too confusing. In one ad, for instance, a dog donning a birthday hat jumps through a hula hoop that a young girl is holding over and over again. The message: "No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start."

"I do think they're trying to be too cute and entertaining," said Laura Ries, president of Atlanta-based brand strategy firm Ries and Ries, which has worked with such names as Walt Disney and Microsoft. "I think a more direct message would work better."

Analysts say that Penney will have an easier time conveying the everyday pricing plan once shoppers start to see new brands and other changes that Penney is making in the store. In August, the chain plans to add 100 little shops within its stores that will either focus on one brand or a variety of labels. The shops, which include new brands such as Martha Stewart and designer Nanette Lepore, will replace the sea of clothing racks that have become typical in department stores. Penney also plans spots in its stores called Town Squares that will offer services and advice.

"I am rooting for Ron Johnson to hit a home run," said Ronald Friedman, the head of the retail group at Marcus LLP, an accounting firm that works with clothing companies. "But it won't happen overnight. This is a process. It will take between 12 to 18 months."


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