J.C. Penney’s Stock Turnaround Remains a Mystery

Optimism surrounds a strategy that hasn't worked yet

   
J.C. Penney’s Stock Turnaround Remains a Mystery

After bashing and basting J.C. Penney (NYSE:JCP) CEO Ron Johnson in the past few months, perhaps its time to take a step back and reconsider.

After all, the stock is up nearly 20% in the past month, cutting year-to-date losses back to about 25% as Johnson and his team work on revamping the stodgy old retailers model of sales, sales and more sales to lure in discount shoppers.

So I’ve done some of the homework, read the reviews, and for the life of me, I still don’t get why the stock is jumping, and more importantly, who (as in buyers) is making it jump.

Maybe it’s hedge fund manager Bill Ackman, who is wallowing around with just more than 39 million shares of JCP and a paper loss of 9% of gross income in his portfolio. Ouch.

No wonder he touts the wonders of Johnson and his turnaround strategy, telling one and all in his quarterly investment letter that he has “complete confidence” in Johnson (see the complete excerpt here). Considering what’s at stake, I would be a cheerleader, too.

Team Johnson is rolling out the “store within a store” model around the country, with the true start of the strategy begun on Aug. 1 when Levi’s brand clothing hit the shelves. The effort rolls out in earnest this weekend when Liz Claiborne — bought from Fifth & Pacific (NYSE:FNP) earlier this year) — PVH Corp.’s (NYSE:PVH) Izod and Penney’s private-label jcp brand will hit 700 of its 1,100 stores just in time for Labor Day. Johnson’s goal is to have 100 specialty stores-within-a-store completed by 2015. (However, one of Johnson’s biggest “gets” — the Martha Stewart (NYSE:MSO) brand — is being battled by jilted Macy’s (NYSE:M) which isn’t happy about the arrangement.)

That’s great and all, but I don’t see anything making me believe consumers will be flocking to JCP stores — at least not in my neck of the woods.

Previous attempts to right the ship have flopped: First-quarter earnings were the worst in almost 40 years, and second-quarter results reported earlier this month weren’t much better, as virtually every line from top to bottom — same-store sales, gross profit, net profit — went down. J.C. Penney also lowered its earnings guidance on FY 2012, and Moody’s even cut JCP’s credit in August.

While expectations are higher for 2013, with profits estimated to be around $400 million, is that realistic?

The competition for the JCP shopper’s wallet is absurdly fierce, but here’s the short list: Department stores like Sears (NASDAQ:SHLD), Dillard’s (NYSE:DDS), Saks (NYSE:SKS) and Macy’s; discount clothes retailers like TJX (NYSE:TJX) (T.J. Maxx) and Ross Stores (NASDAQ:ROST); and big-box retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT).

With no disrespect nor malice in mind, if J.C. Penney already scared off a horde of shoppers, how on earth do they expect them to return? JCP would need something game-changing in the offing, and the Liz Claiborne line hardly seems it.

J.C. Penney has some cash on hand, plus no more dividends to weight down flow, and cuts also helping on that front … so JCP’s life should be extended through at least 2014, which buys you enough time to see whether the revamped strategy is on the right track or dead in the water.

But buy the stock now? Not a chance.

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


Article printed from InvestorPlace Media, http://investorplace.com/2012/08/jc-penney-jcp-stock-turnaround-remains-a-mystery-sks-kss-m/.

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