J.C. Penney Co.’s new executive team last month laid out its plans for the company’s transition into what they feel will be “America’s favorite store.”

J.C. Penney Co., Chief executive officer Ron Johnson, Nanette Lepore, Ellen DeGeneres, town square, Chief operating officer Mike Kramer, Barclays Capital analyst Robert Drbul

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Reinvention process begins at J.C. Penney

February 6th, 2012

NEW YORK – J.C. Penney Co.’s new executive team last month laid out its plans for the company’s transition into what they feel will be “America’s favorite store.”

Speaking at a two-day launch event here, the executives provided the details of their strategy to remake the company.

Chief executive officer Ron Johnson, who took the helm last fall, said that one of the first things the company will do is scrap the nonstop promotions at its stores and move to three kinds of prices (everyday, monthly specials and clearance).

Penney’s promotional pricing efforts, he said, were little more than “fake prices” — artificially inflated prices that are on near-constant markdowns.

The strategy, he stressed, did not fool customers.

From 2002 to 2011 the average cost that Penney paid for an item stayed about the same, between $9 and $10. During that period, though, the company increased the average price tag from about $27 to $36. However, customers ended up paying less because of coupons or sales.

"Now most things are on 60% markdown, and every time we do that, we’re discounting Penney’s brand,"Johnson said.

In fact, he noted, 72% of the company’s revenue came from products sold at a discount of 50% or more.

Meanwhile, Johnson announced a new designer partnership with Nanette Lepore, and a new spokeswoman, Ellen DeGeneres. He also introduced a new logo and advertisements that barely mention prices.

Within four years, Johnson said, Penney’s stores would be completely redone, each divided into about 100 stores within the store with a “town square” at the center.

The stores within the store will be brand-specific shops that will help highlight the diverse range of products available under the J.C. Penney umbrella.

"We are fundamentally re-imagining every aspect of our business, and we fully expect the bold and strategic changes we are making to our operations will result in improved profitability," Johnson said.

The company plans to spend $800 million this year to install the first wave of the shops and improve technology. Ten shops will be added to each of J.C. Penney’s 1,100 stores this year.

Chief operating officer Mike Kramer said the company expects to trim its expenses by $900 million over the first two years of the transformation by lowering selling, general and administrative expenses to under 30% of annual sales in two years and to 27% of sales by the end of 2015. Last year, those expenses accounted for a third of annual sales.

In addition, Kramer said the company will cut costs from stores and advertising, and at operations at the company’s home office.

The dramatic changes at J.C. Penney follow what retail analysts say has been a dismal performance over the past few years.

In November sales at stores open at least a year fell 2%, and in December same-store sales rose just 0.3%, well below industry averages.

The company recently cut its fourth quarter profit forecast because of the bad holiday sales.

In a recent note to investors Barclays Capital analyst Robert Drbul said that from 2006 to 2011, "J.C. Penney has had the worst performance among [its] peers."