It's no secret that
J.C. Penney (
has become a retail disaster over the past five years.
Thetop line has fallen eachyear since 2007, fromsales of $19.9
billion to last year's $12.9 billion.Earnings have followed suit,
slipping from 2007'sprofit of $1.15 billion to anet loss of $985
million in 2012.
In an attempt to stop the bleeding, J.C. Penney's biggest
shareholder, billionaire hedge-fund manager Bill Ackman, was
forced to abruptly removeCEO Ron Johnson from his post last
Few may disagree with the reason for the decision, and many would
agree that making such a change in the midst of a mess is likely
only to aggravate the retailer's woes and add to the list of
reasons not to become a shareholder.
But sometimes the best time to step into astock is when it's a
train wreck. It can often be a headache, but when done right, the
person brought in to clean up the mess can help investors make
alot ofmoney .
To show you what Imean , take a look at what happened with
Yahoo (Nasdaq: YHOO)
. StreetAuthority's Amy Calistri told her
Stock of the Month
readers that Yahoo was a "buy" back in August of last year, three
weeks after Marissa Mayer took the reins of a company many
thought was unsalvageable.
The stock's up about 50% since then and still going strong,
largely on the heels of Mayer's focus on mobile and smarter
So what needs to happen at J.C. Penney to drive its stock to
Yahoo-like success? Three things:
There can be no doubt as to the one thing Ron Johnson unwisely
axed during his short tenure at J.C. Penney's, and the one thing
Ullman needs to reinstate now: well-advertised, crystal-clear,
theme-driven sales, complete with newspaper inserts and TV
commercials. We've seen a glimpse of a return to this approach
already, but consumers have yet to see the 590 promotions J.C.
Penney was running each year before Johnson took over.
As insane as that frequency of sale-based advertising seems,
especially at $2 million a pop, it was still more effective than
Johnson's "everyday value" approach. It's effective because it's
the approach the company had trained its best customers to
respond to for decades. Old habits die hard, and new ones are
tough to start.
Back to basics. The conversion of J.C. Penney stores into a "shop
within a shop" venue had its merits, which Johnson was quick to
tout. The shops'sales per square foot were phenomenal, hovering
around $260 per year compared with an average of $134 per year
for other areas of its stores. The math, however, never quite
While the shops were doing well, overall sales were falling at
double-digit rates; 2012'srevenue was lower by 25%. Translation:
Either theupside of the specialty shops was being overestimated,
or the weakness from the rest of the store was being understated;
it may have been a mixture of both.
Regardless, it's pretty clear that the focus on higher-profile
brand names like Joe Fresh and Liz Claiborne was more than
upending sales of basics like socks and underwear. Ullman needs
to get that bread-and-butter business back.
While missions one and two are fairly specific, the third item on
Ullman's agenda is a little more ambiguous, though still
palpable. He needs to assure investors that thecapitalization
structure is stable.
Between significant credit-rating downgrades fromMoody's and
Standard & Poor's, a $1.75 billion senior securedloan from
Goldman Sachs that's costing the company an extra $100 million
each year, acapital expenditure plan that took $810 million out
of the coffers last year (a plan that is likely to linger into
2013), and rumors of a strategicChapter 11 bankruptcy filing,
shareholders are understandably worried about being on the wrong
end of a bad situation. Investorswill need to trust thatdilution
-- or a total wipeout -- isn't on the table before the stock can
really take flight.
Risks to consider:
A failure to complete all three of these tasks could prove to
be a drag on the stock, but the biggest threat posed to J.C.
Penney shareholders remains the stores' performance. Rising sales
could solve a lot of problems, and even if Ullman can cross these
tasks off of his to-do list, it might all be for nothing unless
it translates into measurable revenue growth within a couple
Action to take -->
For the time being, no action is needed other than observation.
But if it soon becomes clear Ullman is taking care of these three
particularissues , wading back into a J.C. Penney position could
make good sense. It may feel a little uneasy to step in and try
to catch afalling knife before the repair work is done. However,
waiting until it's clear the company is back on track may mean a
great deal ofgains from the stock have been missed; themarket has
a way of handicapping the future pretty effectively. If you can
find that sweetspot between the J.C. Penney's green shoots and it
being in full bloom again, Yahoo-like upside in relatively short
order isn't out of the question.
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