JC Penney: buy or short?
Despite the whirlwind downfall of JCP over the past year, there are many reasons to believe that the turnout for JCP will be successful:
1. It has a proven strategy for profit.
Unlike many other companies that experienced downfall (e.g. RIM), JCP has a clear strategy and one that has been tried and proven successful. When RIM spiraled downwards, the problem was that there was no clear direction for improvement and management needed to make miraculous changes for a successful turnaround. However, JCP does not have to do anything dramatic – it merely need to go back to the way things were before Ron Johnson made the changes. In 2006, JCP had an impressive sales per square foot of $164, a growth of 6.3% from the previous year, which is comparable to that of Macy’s $172.
2. Solid management in place.
The most obvious being the rehiring of Mike Ullman, who was CEO from 2004 to 2011 before being replaced by Ron Johnson. Ullman saw the success and profitability of JCP before it being ruined by Johnson. Less well known is the rehiring of Ken Mangone, the executive vice president of product development design and sourcing, who spent 35 years developing the private label brands at JCP. Private labels are the backbone of JCP and accounts for 50% of its business. With key people in place, the company is well positioned for recovery.
3. It understands what went wrong.
The 3/21/2014 10-K states ” Our prior strategy focused on everyday low prices, substantially eliminated promotional activities, emphasized brands in a shops presentation and introduced new merchandise brands. These merchandising and pricing strategies did not resonate with our customers.” Johnson also eliminated favorite brands like Ambrielle and St. John’s Bay (which used to bring in $1bn to JCP). Recognizing this loss, Mike Ullman and his team has decided to bring those brands back.
The Sephora shops have been popular with consumers. During 2013, when “all other divisions experienced sales declines”, “the women’s accessories division, including Sephora, which reflected the addition of 60 Sephora inside JCPenney locations, experienced a slight sales increase.” It is then common sense to do more of what already works well. JCP plans to roll out 48 more Sephora stores in 2014.
4. The worst is in the past.
Most of the expenses for the turnaround have been incurred in 2013 already. Its NOL will become an asset, as well as its anticipated $19 million in pension asset. As JCP puts it, “during fiscal 2014, we entered the “go-forward” phase of our turnaround as we position the Company for long-term growth”. JCP has made the majority of the effort and expense for the turnaround and it’s now waiting patiently for growth.
Although no one can guarantee that JCP will be able to turn itself around and the risk of bankruptcy is present, with the right people in the right place, there is hope for this favorite American brand.