J.C. Penney Returns to Coupons and Marks Up Prices

June 5, 2013 — -- J.C. Penney, responding to reports that it is marking up prices in stores only to discount them later, is defending its return to sales and coupons after a disastrous foray into everyday low pricing.

Recently, WCPO-TV in Cincinnati took cameras into a J.C. Penney store that showed higher prices on stickers placed over lower, original prices. One Nike women's t-shirt had a price of $25 on a sticker, which covered up an older price of $15. On a child's swimsuit, an $18 sticker covered up a $13 price tag.

A spokeswoman for J.C. Penney provided a statement regarding its re-ticketing effort, which primarily affects the store's private label brands.

Former CEO Ron Johnson, who was fired in April, did away with coupons and sales in place of "Fair and Square" every day pricing and "stores" within the store. The company had losses of more than $1.1 billion in the year ending Feb. 1 as its stock slid more than 60 percent.

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"Last year we created an everyday pricing structure that did not resonate with our core customer," J.C. Penney's statement to ABC News read. "While our prices continue to represent a tremendous value, we now understand that customers are motivated by promotions and prefer to receive discounts through sales and coupons applied at checkout. So we are returning to a promotional pricing model that is commonly used in the industry to give customers the value they are looking for when they shop with us."

The company, based in Plano, Texas, is also the subject of a lawsuit aiming for class-action status, accusing the department store of falsely advertising "original" and sale prices for its private branded and exclusive branded apparel and accessories.

J.C. Penney's response to the lawsuit is due next week. The lawsuit was originally filed last year in the U.S. District Court in the Central District of California.

Paul Swinand, analyst with Morningstar, said markups are a typical business practice.

"I don't think LVMH has to apologize for marking up Dom Perignon champagne," Swinand said. "Tiffany marks up its diamonds. Different companies have a different view on markdowns. The last thing Tiffany wants to see is a marked down diamond."

Swinand said luxury hand bag maker Hermes would rather destroy their bags than mark them down.

"They don't want anyone to think that bag is worth anything but $10,000," he said.

Swinand said the problem with J.C. Penney is they "haven't been able to un-train their customer."

"The problem here is the customer was trained to buy the product only if it was marked down," he said.

Despite these accusations and hiccups, J.C. Penney's business is "just getting its legs back on the ground," and "meaningfully changed course following the departure of Ron Johnson and the return of CEO Mike Ullman," according to Matthew Boss, an analyst with J.P. Morgan.

In a note to investors on Tuesday, Boss wrote that the company is returning to "High-Low" promotional pricing: re-implement coupons (i.e. $10 off $25) and sale promotions to drive traffic with initial price points increased 40 percent of average."

Boss was not available for comment.

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Since J.C. Penney returned to couponing in late February, Boss tracked a sample of 50 items on a weekly basis, he explained in another note in April. The company initiated "original price" hikes of over 50 percent on average, Boss found.

In March, Dockers' "Off the Clock Flat-Front Chinos" were priced initially at $35, Boss wrote in his note to investors. At the end of April, the "original price" was raised 66 percent to $58 with the out the door price unchanged at $35, given a highlighted "40 percent off sale" to the customer.

Boss wrote that "the magnitude of the change has not gone unnoticed to the customer."

The original plaintiff who filed a lawsuit against J.C. Penney last year is Cynthia Spann of Los Angeles County. She bought "over $200 in private branded and exclusive branded apparel and accessories" at J.C. Penney's store in Brea, Calif. on March 5, 2011. Spann declined to comment, according to her attorney, Matthew Zevin.

Zevin said his client is accusing J.C. Penney of having a ticketed price attached to a product, such as a blouse for $30, at which the company never had an intention of selling at that price, "at least not at significant quantities."

He said the company would mark down prices quickly, such as in a day or a week.

"So it's not that they're taking a price and marking it up higher. They're just starting out at an unreasonably high price and selling it at a lower price," he said.

Tod Marks, a senior editor and shopping expert at Consumer Reports, said the accusation against J.C. Penney is reminiscent of past court decisions that determined a product had to be sold for a specific price for a certain number of days per year in order for the retailer to make a claim about percentage savings.

"I haven't heard of marking up to subsequently mark down. I have heard about inflated MSRP stickers that exaggerate the original price so the markdowns look more generous," Marks said.

In 1997, Marks investigated mattress buying and described how ads make mattress sales seem rare, although they occur frequently.

"We discovered a so-called sale promoting 60 percent savings over regular prices, and while the number sounds impressive noted that the original price was essentially mythical," he said.

J.C. Penney did not respond to a request about the lawsuit filed against the company in California.

The practice uncovered by WCPO-TV is not described in the lawsuit filed against J.C. Penney.

The Federal Trade Commission has called the pricing described in the lawsuit as "deceptive," according to the complaint.

The FTC's Code of Federal Regulations states: "Where the former price is genuine, the bargain being advertised is a true one. If, on the other hand, the former price being advertised is not bona fide but fictitious -- for example, where an artificial price, inflated price was established for the purpose of enabling the subsequent offer of a large reduction -- the 'bargain" being advertised is a false one; the purchaser is not receiving the unusual value he expects."

California state law also prohibits false former pricing schemes in the California Business & Professions Code and California Consumer Legal Remedies Act.

A similar lawsuit was filed against Kohl's in 2010 in California. Two weeks ago, the U.S. Court of Appeals for the Ninth Circuit reversed a district court's dismissal of the case that the plaintiff did not suffer any damages or injury.

Antonio Hinojos, a resident of West Covina, Calif., hopes to represent a class of Kohl's customers. Hinojos, who declined to comment to ABC News, used his Kohl's credit card to buy over $500 in apparel and luggage products at Kohl's Glendora in Calif. on May 6, 2010, according to the complaint.

Kohl's did not return a request for comment.

With the Court of Appeal's decision that the Kohl's lawsuit can move forward, attorneys for Kohl's and the plaintiff will next engage in discovery at the district court level.

"We allege that Kohl's essentially lies about its regular original prices and those prices are not set with the good faith of intentionally selling a significant quantity of products at those prices," said Zevin, who also represents Hinojos against Kohl's. [They are] listed to create the illusion of a sale because Kohl's intends to sell the product at a much discounted sale price."

Editor's note: This story originally stated that ABC's affiliate in Phoenix went into a J.C. Penney store and found price tags that had been marked up. The correct TV-station is ABC affiliate WCPO-TV in Cincinnati, which investigated pricing at J.C. Penney stores in Cincinnati. In addition, J.C. Penney's statement in response to the report did not explicitly acknowledge the practice.