J.C. Penney has fired the first shots in a holiday season price war -- pants and other items for just $1.97.
As shoppers look for bargains this shortened season, major retailers are in a dogfight for consumer dollars—extending store hours, opening on Thanksgiving Day and cutting prices.
But after a failed rebranding effort hatched by former CEO Ron Johnson, J.C. Penney isn't just trying to offer good deals but to clear out older inventory to boost its beat-up balance sheet, analysts said.
Combined with a restocking of core items, that goal has caused the struggling retailer to slash prices on items to near-giveaway levels before Black Friday sales even begin. And although Penney's reported on Wednesday that same-store sales fell 4.8 percent in the third quarter, the company reiterated that its performance improved in October and expressed optimism related to a stronger November.
J.C. Penney shares, which had slumped 45 percent in the last year, fell initially on earnings news but quickly rebounded and were 7 percent higher on Wednesday afternoon.
In response to claims that Penney's is virtually giving away merchandise, CEO Mike Ullman said after the earnings release that there is no remarkable difference between the company's promotions now and those in 2011.
But analysts said Penney's dramatic price cuts and improving sales trends could put pressure on competitors such as Target, Kohl's, Sears and Wal-Mart. They remain bullish on Macy's and TJX.
Brian Sozzi, chief equities strategist at Belus Capital Advisors, noted that for the past month or so, markdowns have increased to 40 percent to 50 percent in categories such as women's apparel and up to 80 percent in home goods. Competitors such as Macy's typically discount 25 percent to 30 percent, with deep price cuts normally reserved for off-pricers such as T.J. Maxx.
J.C. Penney has "one goal this holiday season—to clear through basically everything that Ron Johnson brought to the table," Sozzi said.
He pointed out price cuts of up to 50 percent on the Joe Fresh brand. Johnson pushed the label aggressively during his 17-month tenure, dedicating a large chuck of square footage to it in nearly 700 stores.
Deutsche Bank analyst Paul Trussell said the deep discounts also extend into the home section, particularly on the Bodum brand.
But the problem isn't exclusive to Johnson's initiatives. Trussell said the severe cuts carry over into Penney's private-label brands, such as St. John's Bay and Arizona.
Sozzi referred to a picture he had recently snapped inside Penney's Smith Haven store, on Long Island, N.Y., where every item on a rack of apparel, including a pair of Izod pants, was offered at a clearance price of $1.97.
"The company has focused on bringing back what I would call its 'stack 'em high and watch 'em fly' strategy in basics," said Trussell, referring to items such as polo shirts and basic bedding.
Sozzi said that, at such markdowns, even if Penney's merchandise looks just "OK," Target and Kohl's risk losing sales. The latter is at higher risk because Penney's, with its Sephora shop-in-shops, has better beauty offerings and a better accessories department, he added.
Last week, Kohl's reported a 1.6 percent decline in same-store sales in the third quarter and provided a weak holiday forecast.
Morgan Stanley analyst Kimberly Greenberger attributed Kohl's dampened outlook to the competitive environment, specifically citing the fact that Penney's is regaining market share faster than expected.
"I think the wake-up call was when Kohl's reported last week and the stock got hit," Sozzi said. "I think they're going to be the ultimate loser of J.C. Penney trying to beat out Macy's for the holiday."
Trussell said Kohl's is especially vulnerable because its promotional strategy and product are similar to Penney's.
He named Bon-Ton Stores, Walmart, Gap's Old Navy and Sears as stores that could be affected by Penney's markdowns, though he added that it remains to be seen whether they will give back any of the share they stole from the retailer in the rebranding's aftermath.
"I think that they will certainly be more of a threat than what we saw last year," Trussell said. "Penney's was clearly a market-share donor a year ago, and they are out to fight to grab some of that share back this year."
But analysts were also quick to point out that J.C. Penney needs extra volume to turn a profit.
In October, the retailer announced its best monthly same-store sales result since December 2011, but the 0.9 percent rise came among a merchandise margin of 29 percent to 31 percent. The typical range for a department store is 37 to 39 percent, Sozzi said, which means that more people will need to come through the doors both during and outside of the holiday season.
"In off-peak periods no one is going to J.C. Penney—despite the markdowns," he said. "Traffic should be up if you're giving the store away."