Hedgeye Retail Sector Head Brian McGough pointed out an interesting fact about JC Penney (JCP) yesterday. With JCP opening these individual shops within its stores, we wonder if the company knows how Americans really dress. We’re talking about the postman in Ohio and the auto worker in Detroit; middle class, blue collar, hard working Americans who do their clothes shopping at places like JC Penney.
With the debut of the Izod Shop inside JCP this week, it appears that JCP will have to be aggressive with pricing in order to sell some of the fashions it’s carrying. Take a look at the photo above and ask yourself: would a blue collar John Doe worker in Michigan wear a top like this? McGough explains:
The new Izod shop opens a discussion for JCP’s customer acquisition cost rising faster than revenue and competitive pricing pressure.
· We like much or what JCP is doing to its merchandise right now, no means a change in tone for us
o Our call has never been about product, the cost associated with changing around a retailing strategy by such a startling degree, and the extent to which JCP will wake several sleeping giants (KSS, Macys, Gap) with its aggressive pricing strategy which will ultimately come back and haunt them
· The reality is that the cost of customer acquisition is going up very dramatically
o It’s hard for this product to have such broad appeal to the people that they already count as customers
· The punchline for JCP is that the revenue delta will improve - but it won’t outstrip the painfully eroding cost delta
o That’s bad for JCP. For others like Macy’s, Kohl’s, and Gap, it means that JC Penney is – come hell or high water – bringing more product into the US to sell at what it thinks will be very sharp everyday low prices
o The thing that people miss is that 100% of this product WILL SELL. It’s just a question as to what price it sells