Thursday, October 11, 2012

Is J.C. Penney Finally on the Comeback Trail?

We've regularly updated readers on the plight or progress, as the case may be, of Penney's attempts to restructure operations and better appeal to customers. Under a new CEO from Apple, the retailer has suffered several setbacks.

Now there seems to be better news developing, so I wanted to share it with you.

{NOTE: In the interests of full disclosure, I own no Penney's stock and don't intend to own any either. Not because it's a bad company but it's too risky for me due to the fact that I intend to own whatever I buy for the indefinite future, and J.C. Penney has too many competitive hills yet to climb to assure its long term success. The stock is up more than 6% today at $25.69.}

Penney's Pinch Could Soon End has the story of the hoped-for successful makeover underway:

"The list of retailers that have tried, and failed, to reinvent themselves is long enough that investors who put their money on J.C. Penney at the start of the year had to have known they were taking a chance.
That doesn't make what has happened any less painful. Since CEO Ron Johnson last January laid out plans to eschew sales and promotions in favor of everyday low prices, eliminate coupons and develop "stores within a store," he predicted a rebound in earnings that simply hasn't happened.

When Penney last reported results in August, it posted a sharp decline in sales that led Moody's to cut its debt rating on the company. Mr. Johnson spent much of the earnings conference call detailing the things he had done wrong, including missteps on marketing and pricing.

But more recently, it has begun to look as if some of Mr. Johnson's efforts to transform the company have begun to gather some traction. The stores are starting to look spiffier, with improved sightlines and displays.

And the company has begun to roll out branded in-store shops, including Levi's, Liz Claiborne and Izod, which appear to be doing well. In a conference call with investors Tuesday, Levi Strauss CEO Chip Burgh said that his company's sales have done much better in the approximately 700 Penney stores that have added Levi's shops since August than in the remaining 400 Penney stores.


J.C. Penney store at the Manhattan Mall in N.Y.

The success of those initial shops is important, because the company needs to establish a track record quickly in order to attract the brands behind the 100-odd shops that Mr. Johnson wants the average Penney store to eventually contain. They are also a way to roughly gauge whether customers are starting to buy into Penney's new image and shedding their view of it as a drab place where older people shop for bargains on socks.

It may still take a while longer before the improvements really show up in Penney's results. The store-in-stores so far account for only about 10% of the selling space in the Penneys that have them. Moreover, through January, the company will be up against a year-earlier comparison from when it was still using coupons and discounts to drive sales.

Still, the coming holiday shopping season will be an important test of whether the signs of improvement that Penney has lately been showing are real or not. If they are, Mr. Johnson will get the resources to see his experiment through. Crucially, the shares, which now trade at 0.34 times the past year's sales versus a 20-year average of 0.45, will look cheap in retrospect."

Summing Up

Maybe old dogs can learn new tricks.

We'll see what the consumers have to say as the holiday season unfolds.

For my money, I'll stick with Wal-Mart, although I do hope Penney's turnaround story proves to be a successful one.

Like most people, I like to cheer for the underdogs. I don't like to bet on them though; just cheer for them.

Stay tuned.

Thanks. Bob.

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