Over time, the nation's major department stores have always
sought to provide consumers with a unique shopping experience.
Sears Holdings (Nasdaq:
SHLD
)
was known for a healthy mix of hardware and appliances along with
the usual assortment of clothes, jewelry and shoes.
Kohl's (NYSE:
KSS
)
was known for a solid merchandising touch in its clothing lines --
at reasonable prices.
Target (NYSE:
TGT
)
, for its part, sought to be the home of trendy designers, such as
Isaac Mizrahi and others.
Yet in the past half-decade, it's become increasingly hard to tell
these chains apart, as they've started to replicate each other's
look and feel inside stores. As a result, same-store sales
andprofit growth have cooled off, and only
Macy's (NYSE:
M
)
can truly say that it has picked upmarket share with consumers.
Investors have surely taken note:Shares of Macy's are up roughly
20% during the past five years. That may not seem like much until
you realize that Macy's rivals have all seen their stocks move
lower in that time frame.
Perhaps no retailer has suffered from the industry's glut of me-too
stores more than
JC Penney (NYSE:
JCP
)
. The company's board realized that this once-thriving retailer had
lost its edge and needed a change. It did so this past autumn and
hired former
Apple (Nasdaq:
AAPL
)
executive Ron Johnson to turn things around. His efforts thus far
have been quite uninspiring, so investors are still saddled with a
losing play: Shares of JC Penney are off a whopping 60% during the
past five years, the worst performance of any major department
store retailer.
Breaking the discount habit
JC Penney's Johnson quickly tried to show that he was unlike most
retail executives. He made a bold move that clearly hurt the
company's results in the near-term, yet it will likely end up
helping in the long-term. He decided that the never-ending process
of discounts and promotions had conditioned consumers to avoid
paying full price. For this retailer, this means thatearnings
before interest,taxes ,depreciation andamortization (EBITDA )
margins had begun to steadily fall from around 11% in the middle of
the past decade, to the 6% to 7% range in fiscal (January) 2010 and
2011 to just 3% in fiscal 2012. Johnson realized that the only way
to rebuild margins was to get consumers to pay full price.
Of course, if the company's stores are virtually identical to
rival's stores, then why would consumers want to shop at JC
Penney's? Here's where the Apple angle comes into play. Johnson has
been hinting for quite some time that JC Penney would emerge as a
very different kind of retailer. And now we have a glimpse of what
he's been planning.
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The Texas prototype
On Sept. 19, JC Penney walked analysts and the financial media
through a heavily revamped store in Dallas, and it quickly became
clear how JC Penney aims to be different. Note that Apple has had
remarkable success in its retail efforts by creating a compelling
environment for consumers to simply come in and hang out. Many
consumers go to Apple's stores with the mere intention of browsing
and seeing the latest offerings. Yet many end up making a purchase
anyway. The conversion rate -- or Apple's ability to turn foot
traffic into retail sales -- is among the highest in the business.
In a similar vein, Penney's Dallas prototype aims to draw in more
foot traffic, but without aggressive sales tactics. Instead,
consumers are encouraged to browse and meander, and not explicitly
seek out a purchase. It's a counter-intuitive logic that just may
work. To attract consumers, JC Penney employs a three-part
retailing concept:
• Shops: Where consumers enter into unique store-within-a-store
units that feel very different from the traditional big box
department store experience.
• Streets: Which are lined with coffee bars, juice bars and other
places to stop along the way.
• Squares: Where family members that don't plan to shop (such as
dads and kids) can hang out and engage in activities, such as
games.
Tying these together is a heavy use of technology -- from what
customers can feel and use, to back-office administration efforts.
That's another page from the Apple playbook. Analysts at Citigroup
say that a heavy use of technology "...will create a faster, more
enjoyable shopping experience for the customer and will lower the
overall operating costs of the store."
Risks to Consider:
JC Penney is launching thisturnaround while consumers remain
under duress. Major sales gains may be hard to achieve until
theeconomy is on firmer footing. In addition, rival department
store operators are paying attention and may look to mimic JC
Penney's moves if they are successful. Lastly, management has
recently noted that same-store sales at most of its
(yet-to-be-revamped) stores remains tepid, so near-term quarterly
results are likely to be mediocre at best.
Action to Take -->
Despite a well-received presentation of the new Dallas prototype,
shares remain stuck in the mud. That's because analysts have no
reason yet to change their earnings models, and they see a stock
that is fairly valued based on near-term operating metrics. Yet
that's precisely the backdrop you should look for when seeking out
turnaround stocks.
Once a few of the new JC Penney stores have rolled out, the
company has the potential to deliver improving same-store sales
results. If that happens, then analysts start to extrapolate
newfound momentum across the store base. So analysts may start to
boost their outlook for Penney's profits into mid-decade as the
store upgrades really build a head of steam. That's why you need to
track this turnaround now, and not wait until sales trends are
noticeably better.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.