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Takeaway: $JCP TX store tour provided plenty of eye candy, but was focused too much on sales and too little on costs.

Texas was a certified circus with nearly 400 attendees requiring 7 buses for transport. The Shops looked good as expected though the Street element of their concept was the primary focus and ultimately what Ron wants JCP to be known for, not its Shops. That’s fair and could very well ultimately change the department store experience across much of retail, but these iPad stations, lego tables, checkout bars, etc. as well as free services in Town Square (haircuts, holiday portraits) cost money.

This is an execution story, which requires trust something RJ has little of following recent results as well as one of transformation, which costs money and JCP doesn’t have it.

The real fireworks came during his commentary when he noted that the new Shops were comping up +20% since launch. To put this into perspective they launched Sephora (Penney’s most successful brand) and Levi first, which are outperformers already and then the others during BTS so there’s been a healthy combination of tailwind, selection, and timing at play here. At 12 Shops it’s also a small sample to be pegging growth potential on, which Ackman looked to amplify with his statement rather than question in Q&A suggesting that RJ highlight the performance of the StoneBrier store, which he had shared with the Board the day prior. Needless to say the figures are north of 20%, but RJ declined to offer it out at risk of setting unrealistic expectations.

The closest thing to a mention of costs came shortly after highlighting comps with RJ noting that management is planning for 2H performance to be the same as 1H and the first two weeks of September have been tougher than expected – a little dose of reality.

With these initiatives driving costs higher, the hurdle for leveraging comps is going up not down and will require comps that are not only substantially higher, but also sustainably so. This gets increasingly more challenging as Ron starts running out of tricks at Town Square.

After slapping Keith’s TAIL line of resistance up at $32 yesterday, the sharp reversal strongly indicates that this is indeed a broken tail risk call with no TRADE resistance until the low $20s.

JCP: Slapping the Tail in TX - JCP IntradayStockChart

JCP Store Tour Highlights/Takeaways (9/19/12):

  • Store at Valley View a 16-year old location taken over from Bloomingdales
  • 180,000 sq. ft. much bigger than JCP needs so turned entire 3rd floor into a 'shop lab'
  • Mocked up 3rd floor an example of what a remodel would look like (same old ceilings, etc), NOT how they would build out a new store
  • Mock up is ~30,000 sq. ft. build out with 17 shops and the Street (suggesting ~150,000 sq. ft. concept)

New Store Format Layout - Example of Baby/Kids Section:

JCP: Slapping the Tail in TX - JCP StoreLayout

Baby Battle:

  • Announced Disney is the latest baby/kids brand added to the stable (9/19)
  • Now have Carter's, Disney, and Giggle
  • Looking to fill out offering in the toddler-to-tween gap
  • Giggle: will be expanding apparel offering from what Giggle retail store mix
    • JCP will be manufacturing the goods themselves in order to meet demand (Giggle concept has only 13 retail stores)
    • Will be priced at ~15%-20% premium to CRI/Disney product - lower than at Giggle retail

RJ presentation:

  • Created the Street 5 ft wider than typical corridor
  • Checkout bars give more space for other shops (e.g. Carribou Coffee stand where cash wrap used to be)
  • Want consumers to think of JCP as the "Street" not necessarily the shops themselves
  • Expect 25 stores to turnover every year, will turn merchandise 2.5x typical department store
  • Town Square - offer haircuts, juice bar, will have holiday portraits and Santa - not about selling stuff, but transforming retail
  • Shop rollout:
    • 12 shops by Sept '12 (next year holiday will have ~40 shops)
    • Collective shops-to-date comping 20%
    • Sephora comping double-digit (adding ~75 Sephora stores/yr)
    • Levi running up double-digit
    • Dockers, Haggar, Disney (~580 store target - they have ~200 of their own), Levi - a few recent additions
    • Sephora, Joe Fresh, Bodum (in all 700 stores), Giggle(~700) - by next April
  • Model provides brands with an option to grow domestically at no rent, no buildout
  • Street additions include - Carribou Coffee, Sugar Shack, Paciugo (gelato), dpHUE (hair coloring)
  • Avg. 1.2mm sq. ft. mall has ~100 stores - consumers will have the same choice w/in 130,000 sq. ft.
  • Planning 2H to be same as 1H
  • +20% comps represent only 10% of sales so 2pt contribution to comp - not enough to offset down -20% - need critical mass
  • First two weeks of Sept tougher than JCP expected
  • Key will be to staff properly
    • AAPL had 50 employees originally, now running closer to 150/store

JCP: Slapping the Tail in TX - JCP TTT

Casey Flavin