In the history of retailing, James Cash Penney is a legend. In 1902, he started J. C. Penney (NYSE:JCP). In fact, Penney was a mentor to Sam Walton, who went on to create Wal-Mart (NYSE:WMT).
Unfortunately, Penney is a shadow of its former glory. But this isn’t stopping the company. Last week, it announced the hiring of Ron Johnson, who was responsible for the creation of the wildly successful Apple (Nasdaq:AAPL) stores. On news of the hiring, the shares of J.C. Penney surged 17%.
But can Johnson bring back the magic to a company that has a tired brand? Let’s take a look at the pros and cons:
Pros
Restructuring. Over the past few years, Penney has engaged in cost-cutting and score closings. The result is that the company is much more streamlined.
Also, the company has continued to grow. For example, same-store sales grew by 2.5% last year.
Strong backing. Penney’s largest investor is William Ackman, who manages Pershing Square Capital Management. His firm owns 16.5% of the outstanding shares. Ackman has a long history in the retail space and will certainly be proactive in improving shareholder value.
Bold actions. In the crowded retail space, it’s hard to differentiate J.C. Penney, but this is a big opportunity for a visionary like Johnson. The hiring also shows that Penney is willing to break barriers and take some bets.
Johnson is also no one-hit wonder. He was key in Target’s (NYSE:TGT) transformation to premium brands.
Cons
Economy. It is hitting a “soft patch” and this is likely to hurt sales. In fact, Penney’s core customer segment is Middle America, which is getting squeezed as unemployment continues to be a huge problem.
Costs. The increase in commodities has had an impact on the company. Perhaps the most worrisome has been cotton prices. There are also cost pressures from foreign suppliers, such as in Asia.
Competition. The environment is fierce, with rivals like Macy’s (NYSE:M) and Kohl’s (NYSE:KSS). It is usually difficult to main an edge for any meaningful amount of time.
Verdict
There’s no doubt that the hiring of Johnson was a big coup. He’ll definitely be a huge help in rejuvenating the company and find opportunities for growth.
Despite this, it’s going to take time to get results. If anything, the short term is likely to see some strong headwinds, especially with the slowing economy.
In addition, the stock already looks fairly valued, at 20 times earnings. The cons outweigh the pros for J.C. Penney.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
