Will Coffee Help This Department Store Turn Things Around?

Adrian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We all know by now that J.C. Penney (NYSE: JCP) is undergoing some major changes in an effort to transform its stores and turn things around. The main idea is to de-clutter the stores and focus on shops (stores within the store) to make customers more comfortable while shopping and try to keep them in the stores as much as possible.

This approach may work if it’s done in a revolutionary way, a way that elevates the shopping experience to a whole new level. But, how can that be done?

Well, after reading and reading through the earnings releases and company presentations along with other reports in the industry, I came to a conclusion; JCP is focusing on the customer experience (as they should) and not just on sales through coupons and “special” sales like some of its competitors.

When focusing on the customer experience, they will be engaging customers in a nice environment that can’t be found anywhere else. First, by cleaning the stores (less merchandise), they are assuring that the customers will have a better impression of the store. Based on personal experience I'd much rather be shopping in a place where I can easily find and appreciate what’s on display than having to go through endless racks of merchandise poorly classified.

Step two is creating the “shops,” as they are referring to them, specializing in a type of merchandise instead of shifting merchandise every month just to fill in the space shelves. Having employees dedicated to those shops will allow them to be more knowledgeable of the products they sell, and therefore help customers make better decisions when buying. Competitiveness also plays a big role here; in-store competition can be implemented between shops to improve sales. Incentives are well known for working in this type of industry.

But, how do you keep a customer engaged in your store?

The Square.

“… a re-imagined center core experience. The square won’t be about selling products, but rather a gathering place for ongoing attractions and services,” as stated on page 15 of the JCP summary annual report for 2011.

JCP will be offering a place to relax, a place to hang on, to drink coffee and more. Starbucks (NASDAQ: SBUX) is a natural fit to this new environment. Having brand recognition as they do and a loyal customer base can increase the opportunity to offer a truly different experience for J.C. Penney.

In a press release from Starbucks on Dec. 5, Cliff Burrows, president of Starbucks Americas and U.S., “announced that his region planned to add more than 3,000 net new stores” where “at least half of the new stores are expected to be in the strong, rapidly growing U.S. market.”

Even though nothing hinted that this partnership will happen, I do believe it’s a great possibility given the reasons I mentioned above. Customers will benefit from having a Starbucks coffee shop in the store (at least on the customer experience side). Happy customers tend to stay within the store longer, increasing the possibility of more sales.

J.C. Penney still faces tough competition in the industry; for example Kohl's (NYSE: KSS), which in my opinion is a very similar company to JCP (when comparing balance sheets, as you can see in the table below), has an edge over JCP because they're actually reporting profits every quarter. The fact that JCP has not reported any net earnings in the past 7 quarters can affect the way management focuses on this turnaround due to the pressure from investors that may result from the lack of profits.

Balance Sheet Comparison

<table> <tbody> <tr> <td><em>Ticker</em></td> <td><em>Book Value</em></td> <td><em>Cash X Share</em></td> <td><em>Debt / Cash</em></td> <td><em>Debt / Equity</em></td> </tr> <tr> <td>JCP</td> <td>$15.96</td> <td>$2.39</td> <td>13.88</td> <td>2.08</td> </tr> <tr> <td><strong>KSS</strong></td> <td>$26.43</td> <td>$2.39</td> <td>16.40</td> <td> <p>1.48</p> </td> </tr> </tbody> </table>

Earnings Per Share Comparison

<table> <tbody> <tr> <td><em>Ticker</em></td> <td>3Q12</td> <td>2Q12</td> <td>1Q12</td> <td>4Q11</td> <td>3Q11</td> <td>2Q11</td> <td>1Q11</td> </tr> <tr> <td><strong>JCP</strong></td> <td>($0.56)</td> <td>($0.67)</td> <td>($0.75)</td> <td>($0.41)</td> <td>($0.67)</td> <td>$0.07</td> <td>$0.28</td> </tr> <tr> <td><strong>KSS</strong></td> <td>$0.91</td> <td>$1.00</td> <td>$0.63</td> <td>$1.81</td> <td>$0.80</td> <td>$1.08</td> <td>$0.69</td> </tr> </tbody> </table>

Overall, if JCP plans are to change the way people shop, they have to come up with many clever ideas. A Starbucks coffee shop in their stores can be one of them. But remember, this has not been announced nor hinted in any way. It is only a conclusion I came across when reading the press releases of both companies and one I thought to share with you.

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adriano22 has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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