JC Penney turnaround faces big test with home goods relaunch

J.C. Penney is about to undo the centerpiece of former Chief Executive Officer Ron Johnson's failed vision to take the retailer upmarket.

On Thursday, the department store chain is relaunching its home goods sections. It has brought back many of the more affordable, no-frills brands the former Apple executive ditched and reduced the space given to trendier brands he thought would bring in new shoppers.

Penney is trying to rebuild its home business by offering more lower priced items, more in-house brands and additional floor space for basics like towels and comforters. The retailer wants to recapture former clients and go head to head with rivals like Target Corp (TGT.N) and Kohl's Corp. (KSS.N)

Fixing the home business is crucial to Penney's fledgling turnaround, both in-store and online, where it generates half of jcp.com's sales.

"Home is a traffic driver for the whole store," said Jan Hodges, senior vice president in charge of Penney's home goods business. Store visits fell 17 percent during Johnson's term and continued to slip in 2013.

The company, once a leader in the sector, saw sales of home goods plummet to about $1.3 billion in 2013 from $4.2 billion seven years earlier.

In 2006, home products generated about 20 percent of Penney sales, on par with rivals Macy's, Kohl's and Target Corp. Last year, they were about 12 percent.

To be sure, some of the decline stemmed from its decision to get rid of its catalog order business in 2011, but most of it was from misreading its customers.

Initial reaction has been positive. Citigroup upgraded the stock on Tuesday because it expects the new home sections will lift sales. Penney shares have risen since it gave an upbeat 2014 forecast last month but are still 55 percent below a yearly high hit last May.

"They went astray when they brought in $10 cake mix," said Kathy Gersch, a former department store executive and co-founder of Kotter International, a consulting firm that helps companies implement strategies. "The question remains whether they can get that customer back."

Penney will have to win back shoppers who drifted to competitors. At HomeGoods, owned by TJX Cos, sales nearly doubled to $2.8 billion between 2007 and last year, while Target and Kohl's saw steady growth.

CUSTOMERS REMAIN FRUGAL

Adding to the challenge is that many of Penney's price-conscious shoppers remain reluctant to spend on extras. Euromonitor International also expects the $97 billion U.S. furniture and home furnishings market to grow only 2 percent per year in the next five years.

Investors are hopeful that current Chief Executive Myron Ullman, who first led the company between 2004 and 2011, can recover from the mistakes made by his predecessor.

Johnson, CEO for 17 months before being fired, convinced the chain to spend hundreds of millions last year remodeling its 600 largest stores, including new home sections with brand "shops," and lost hundreds of millions more in sales from disruption during renovations.

The revamping of the home sections didn't cost much, Hodges said, and Penney will continue to offer popular brands like Calphalon while expanding its offerings of other national brands, like Royal Velvet bedding and bath towels. The company also plans to keep the uncluttered look Johnson backed.

But Penney is also bringing back lower-priced in-house brands such as Cooks cookware, that Johnson eliminated, and adding bedding, bath and luggage under its Liz Claiborne brand.

Private brands could boost profits because they have a gross profit margin 5 percentage points higher than national brands.

HOME RE-LAUNCH 2.0

On the floor of the Penney store in Elmhurst, N.Y., last week, ahead of the launch, there were six beds rather than three a year ago, so Penney showcased a wider array of pillows, sheets and comforters. Penney has put out more mock-up windows fully dressed with blinds.

Penney is returning to a 60-40 percentage split in favor of soft goods, like bedding and bath products, over hard goods like small appliances since they are more profitable, Hodges said.

Penney is re-purposing shops that previously housed the Michael Graves and Martha Celebrations brands to showcase juicers and blenders, hot items now. The Graves and Stewart products will be displayed with other items in a given category.

By summer, Penney will also re-jig its furniture selection, significantly paring the modern furniture assortment that flopped with its shoppers, in favor of a return to traditional furniture.

"Patience still needs to be the prime virtue for Penney investors when it comes to home," Sterne Agee analyst Chuck Grom said in a research note on Wednesday.