Private Label Job Cuts Ahead at JCPenney?

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Joe Fresh for JCP

Joe Fresh is one of the fashion brands JCPenney CEO Ron Johnson is adding to the store’s mix.

Plano, TX—The news from JCPenney’s yet-to-be-released its fiscal 2012 fourth quarter report isn’t expected to be too good (sales down 30%?), but this week already, the department store has been hit with spate of  bad news items.

In a report today in the New York Daily News, speculation arises that Ron Johnson, chief executive, is about to conduct what’s being called a “St. Valentine’s Day Massacre”—eliminating some 10% of the company’s 3,000  employees, many of them in private label product development.

The Daily News quoted a former JCPenney executive who said the job cuts were planned last year but were delayed until this year.

In January 2012, Johnson announced his “fair and square” strategy that included an everyday low pricing and plans to build a series of shop concepts that would reinvigorate the store and make it more appealing to a younger clientele. While the shop concepts continue to be built—albeit at delayed pace—the everyday low price strategy has been amended to include price-off discounts.

Johnson’s push to build branded shop concepts has come at the expense of its longstanding private label programs which purportedly accounted for about half of JCPenney’s sales. The Daily News quotes sources saying that “upward of 200 designers and product development specialists in that (private label) unit are slated for pink slips.”

JCPenney declined comment, the News added.

The report states that Johnson may axe even more in order to “deliver on his promise to slash $900 million in costs by the end of 2013.”

Cash Strapped in Coming Months?

Earlier this week, Ken Hannah, JCPenney’s chief financial officer, rejected a claim reported by Reuters that the company had breached a covenant of a bond indenture agreement by granting a lien on its inventory.

Commenting on JCPenney recent turmoil, Walter Loeb, a retail analyst, wrote in Forbes:

“At a recent Retail Marketing Society meeting a fixed income analyst from a top Wall Street bank suggested that the company will likely be below its $1 billion cash target at the end of the fiscal year and could be, at or below, $300 million at the end of the first quarter if the company continues to invest in shops at the expected pace during that period.”

Noting that in the past JCPenney spent $1 billion in marketing “with effective results that are now lacking” Loeb said the retailer may be strapped to embark on a new aggressive advertising campaign. At the end of its third quarter, JCPenney had about $525 million in cash, half the amount it had a year earlier.

“I believe that investment bankers are circling the Plano headquarters like Indians would circle covered wagon trains in the desert,” Loeb said. “They sense that the company is running out of money and will have to take some drastic action to revive the momentum, add to the cash flow, downsize or sell the company.”

Despite such negative reports, William Ackman, the activist investor whose Pershing Square Capital Management hedge fund has taken a long position in JCPenney, recently defended Johnson and his strategy one year into the turnaround.

“If three years from now, Ron Johnson is still struggling to turn around JCPenney, he’s probably the wrong guy,” Ackman said.