Is J. C. Penney Set to Win?

Zacks

With the hiring of Ron Johnson a few months back and the ensuing change and ongoing makeover, J. C. Penney Company Inc. (JCP) now has all the ingredients that a company needs to become America’s favorite store. The company’s lackluster performance put it on the back foot while many of its peers have walked away with impressive numbers. So, there remains a Herculean task for the company to identify its strengths and channelize those in the right direction to put itself back on the growth trajectory.

Counting the Strengths

J. C. Penney’s well diversified supplier base, compelling private and national brands, marketing campaigns, point-of-sale technology initiatives as well as effective inventory management should drive sales and margin trends over the long term. The company is leaving no stone unturned to become cost resilient, and is focusing on closing underperforming stores.

In order to enhance customers’ shopping experience, J. C. Penney is also focusing on remodeling, renovating and refurbishing stores as well as refreshing its website functionality, considering the steady migration to online shopping. The launch of compelling new merchandise and the JCP Rewards program should also bode well.

The in-store Sephora departments continue to draw younger and more affluent customers. J. C. Penney has also incorporated stores of MNG by Mango and Call It Spring by The ALDO Group in its store suite.

Makeover on the Cards

J. C. Penney is in a transition process, trying to transform itself from the way it operates now, and Ron Johnson, the Chief Executive Officer of the company, has the blueprint of the turnaround plan to make it the most favorite shopping destination.

In order to uplift itself, J. C. Penney announced a string of measures, which include new pricing strategy (Everyday, Month-Long Values and Best Prices), fresh logo, strategic merchandise initiatives, cost reduction and enhancement of customers’ shopping experience, which in turn will augment store sales productivity, and lead to margin expansion and bottom-line growth.

The company aims to reduce costs by $900 million in the first couple of years of its transformation, resulting in lowering the expenses below 30% of sales. Moreover, the company targets expenses to be 27% of sales by the end of the transformation process in 2015. The company plans to fund the entire transformation process through its cash from operations. To start with, the company will incur $800 million in capital expenditures in fiscal 2012.

Seeking Opportunities

An economy in a state of hibernation remains a bitter truth but relentless efforts to emerge from the doldrums cannot be ignored. Even J. C. Penney is trying every means to tide over a distressed economy.

Its acquisition of a 16.6% stake in Martha Stewart Living Omnimedia Inc. (MSO), an integrated media and merchandising company, is just another step towards uplifting itself. The company is betting hard on Martha Stewart to be a fortune changer. The alliance between the two took place on December 7, and calls for a ‘store-within-a store’ concept. This means that an extensive range of home and lifestyle merchandise designed by Martha Stewart can now be found in a J. C. Penney shop.

In October, J. C. Penney entered into an asset buyout agreement with Liz Claiborne Inc. (:LIZ). Per the deal, J. C. Penney acquired the global rights for the Liz Claiborne portfolio of brands and the U.S. and Puerto Rico rights for Monet, a fashion jewelry brand, for $267.5 million.

Where Lies the Weakness?

J. C. Penney’s sales data has not been an encouraging one. The company, in the last three quarters of fiscal 2011, had witnessed diminishing sales. In the second, third and the fourth quarter, sales dropped 0.8%, 4.8% and 4.9%, respectively.

The company recently decided that it will no longer provide monthly sales results. However, the last available monthly data reveals that sales have fallen persistently in the last five months of calendar year 2011 – 4.5% in August, 3.6% in September, 6.6% in October, 5.9% in November and 2.3% in December. July was the last month when sales inched up 1%.

Further, J. C. Penney has been witnessing falling comparable-store sales. Comps declined 1.9% in August, 0.6% in September, 2.6% in October and 2% in November but showed a sluggish growth of 0.3% in December 2011. In the last reported quarter, comparable-store sales inched down 1.8%.

Concluding Remark

The economy still not out of the woods and whether 2012 will mark the resurrection is tough to say, unless some concrete steps are taken to avoid another cliff fall. Cuts are deep and wounds are not healed. Each and every company is vying to survive the downturn, and eventually be at the helm. J. C. Penney, which does not remain immune to economic upheavals, remains no exception. The company, which has been struggling against retail chains such as Macy’s Inc. (M) and Kohl’s Corporation (KSS), is trying every means to bring back its lost glory.

Given the pros and cons embedded in J. C. Penney, we maintain our long-term “Neutral” recommendation on the stock. The company holds a Zacks #3 Rank that translates into a short-term “Hold” rating.

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