Since June, the shares of J.C. Penney (NYSE:JCP) have made a nice move, going from around $30 per share to a high of $42. Of course, one of main drivers behind that increase is the company’s hiring of Ron Johnson as its CEO. Johnson previously worked for Apple (NASDAQ:AAPL) running the company’s widely successful Apple Store chain.
A few weeks ago, Johnson set forth his plans to remake the 110-year-old retailer. Again, it was enough to excite investors, with JCP shares up as high as 9% since late January alone. But J.C. Penney has slid in the past week, leaving investors wondering whether the stock has gotten ahead of itself.
Should investors still be wary? Let’s take a look at J.C. Penney’s pros and cons:
The Transformation: J.C. Penney is launching a “Fair and Square” pricing strategy, which will mean up to a 40% cut in prices and the end of clearance sales. Now, J.C. Penney will only use three types of price tiers: “Everyday,” “Month-Long” (on certain items) and “Best Price” (for closeouts on the first and third Fridays of the month). While it sounds convoluted, it’s actually a much simpler system than the constant smattering of sales, and should help create consistency.
But Johnson also wants to greatly enhance the store experience. To this end, he plains to have about 100 mini-boutiques (called “Town Squares”) within each store that will have special, non-product offerings like free hot dogs or haircuts.
Quality: Ultimately, J.C. Penney needs great products. That’s really why Apple Stores have been so successful. Johnson has been working hard to improve the merchandise. For example, he has deals to sell products from high-end designers like Nanette Lepore. Johnson also has purchased the Liz Claiborne (NYSE:LIZ) brand and invested in Martha Stewart (NYSE:MSO).
Restructuring: While J.C. Penney has taken actions to reduce its costs over the past couple years, there still is room to find more savings. This includes cutting back on labor as well as improving the information technology infrastructure (which also will be critical for the company’s online efforts). The goal is to achieve roughly $900 million in cost cuts within the next two years.
Brand: Let’s face it: J.C. Penney does not have much pizazz. The store’s brand seems more attuned to a bygone era. Even a maestro like Johnson will have a tough time reinvigorating the perception of the company.
Financial Stability: Fitch Ratings recently downgraded J.C. Penney’s credit to BB-plus, which means the debt is now at “junk” levels. The agency has serious concerns about the company’s ability to improve sales and profitability
Competition: J.C. Penney must find ways to set itself apart from tough rivals like Macy’s (NYSE:M) and Kohl’s (NYSE:KSS). These companies also are adopting similar approaches like simplified pricing and proprietary brands.
So far, Johnson has made some good moves at the J.C. Penney helm, and he seems focused on greatly improving both the merchandising and in-store experience. But such goals are not easy to reach, and easily can take several years. Johnson himself has emphasized that JCP’s strategy is focused on the long term.
However, it looks like investors aren’t heeding that warning. Instead, they seem to be looking at J.C. Penney through the rose-colored glasses of quick-growth Apple fever.
This looks like a potential setup for disappointment. So for now, J.C. Penney’s cons outweigh the pros.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.