J.C. Penney’s Slippery Slope Shows No Sign of Slowing

by Marc Bastow | July 11, 2012 8:40 am

Drum roll, please: J.C. Penney (NYSE:JCP[1]) is finally going to open up its newly designed and refurbished stores for public consumption sometime in August.

The catch? Penney will feature 10 individual shops[2] within each store featuring brand names like Liz Claiborne, Izod, Levi’s and Haggar to their new “jcp” private-label brand of apparel.

The shops are modular units that link to form walls and floor space for display, and Penney’s is looking for 700 stores to get the initial 10-shop model, with a goal of all of its stores to eventually have a multi-shop model in place by 2014.

The goal clearly is to drive consumers to the stores for “branded” name merchandise, rather than the traditional JCP shoppers’ reasons of “bargains” and cheaper prices. That is as dead as the Model T.

Let’s be honest here, though: J.C. Penney CEO Ron Johnson — who famously cut his retailing teeth as head of Apple’s (NASDAQ:AAPL[3]) retailing division — has to see the new future to its end, as the company has no way of going back now. The road is just too far.

Click to Enlarge Penney’s woes are now almost legend since Johnson took over, as the early euphoria of his hiring — combined with some rosy projections for 2012 earnings growth — fueled the stock to a high of just over $43 per share in early February. As it turned out, that would be the height of the show. Here’s a look at what has happened since:

J.C. Penney’s woes are vast and varied, and chronicled at every step, but just for recap’s sake, here are the notable missed steps:

• A “Fair and Square” pricing model[4] ended the “bargains” model, and it tanked quickly as customers got their everyday bargain kick at Kohl‘s (NYSE:KSS[5]) and Ross Stores (NASDAQ:ROST[6]).
• First-quarter earnings and guidance[7] were nowhere near the lofty February predictions, raising just a tad of skepticism in the analyst community.
• The dividend that kept many investors in the stock was pulled, saving lots of money but giving investors even fewer reasons to stay in the stock.
• Expensive (as in a $12 million signing bonus) hired gun Michael Francis, from Target (NYSE:TGT[8]), was unceremoniously ousted[9] from the president’s office after eight months when the new strategies failed to pan out quickly enough.

It’s officially “go” time now at JCP, and the company has a lot of catching up to do in not so much time.

The 2014 target date to complete the makeover to a “shops-in-shop” model means many millions more in expensive construction and remodeling — and the company is already bleeding cash.

Penney’s last three quarters of losses portend further quarterly problems, and with changes in inventories and (non-cash) costs of further restructuring of the company (read: “layoffs”[10]) on the way, a positive cashflow probably is a long way away. And the company recently had its debt downgraded to junk level (BB+) by Fitch, so any new monies will not come cheaply.

More disconcerting, however, is the outflow of customers who might never come back. Historically drawn to the company by discounts and bargains, consumers who found substitutes are unlikely to come back, as the reason they shopped at Penney’s in the first place is gone.

As for the in-house shops, many can find the same brand names J.C. Penney will tout in other stores, like Macy’s (NYSE:M[11]) and Saks (NYSE:SKS[12]), and they won’t have to walk through stores that are under construction for extended periods of time.

And all the meanwhile, the once-decent dividend that might have given JCP stock some sort of floor is gone.

In short, J.C. Penney still has a long way to go just to get back to even — and back to even probably won’t be enough.

Marc Bastow is an Assistant Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/07/jcpenney-jcp-slippery-slope-shows-no-sign-of-slowing/

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