How JCPenney's Merchandising Strategy Could Backfire

JCPenney's business, which has been increasingly stable since Ron Johnson left the helm in 2013, could be headed for a crash.

The department store is increasingly phasing out brand names for private labels, a move that could "lead to market share losses similar to what was experienced in 2011," according to a recent report by Deutsche Bank.

While department stores like Macy's and Nordstrom have worked to showcase name brands, JCPenney has focused more on offering private-label merchandise at a discount.

JCPenney opened a design studio in New York's Soho last year to revitalize brands like Worthington and St. John's Bay.

Making clothing in-house cuts out the middle man and allows JCPenney to make a bigger profit. The retailer can also afford to mark down private-label merchandise, theoretically attracting more customers.

But Deutsche Bank analysts expressed doubt over whether the private-label brands are trendy enough to attract consumers who would rather wear brand names. The bank maintains its "hold" rating on the stock.

JCPenney hired former Apple retail chief Ron Johnson to run the business in 2011. Johnson's strategy of abolishing sales and promotions drove away customers, leading sales to tumble 32%.

He was fired after 16 months on the job.

Despite interim CEO Mike Ullman's attempts to bring back customers with sales, the brand has been hurt by declining mall traffic and poor consumer perception.

JCPenney's new CEO, former Home Depot executive Marvin Ellison, will join the company in November.