JCPenney: This Movie Might Not End Well

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JCPenney (NYSE: JCP) may be headed for an unhappy ending. The retailer has ousted former Apple executive Ron Johnson as its CEO after 17 months of terrible performance under his management.

In February, the company reported a sixth consecutive quarter loss as Johnson’s ambitious turnaround of creating mini-shops boutique-styled stores had a very adverse effect on the company. J.C. Penney's share price has plunged accordingly, dropping approximately 55% since April 2012.

Moreover, the company's dispute with Macy’s (NYSE: M) over products licensed from Martha Stewart Living Omnimedia (NYSE: MSO) is still being handled in court. Macy's sued Martha Stewart, alleging it violated an exclusive rights agreement it signed in 2006. Macy’s also sued JCPenney for buying a 16.6% stake in Martha Stewart for $38.5 million in 2011 for the same reason. This deal implied a stock price of roughly $3.50, and Martha Stewart shares are now trading at $2.35, which suggests that JCPenney lost nearly $12 million on the deal.

The following graph compares JCPenney’s stock performance with Macy’s, from April 2012 to the present:

Source: Yahoo! Finance.

Can Macy’s Take Advantage of This?

Those results are a clear contrast with Macy’s performance. As Terry Lundgren, chairman, president and CEO of Macy’s disclosed, “Earnings per share grew by double-digits for the fourth consecutive year.” Also, net sales increased 4% year over year to $27.7 billion; same-store sales improved 3.7%; online sales grew 41%; and operating income totaled $2.6 billion.

Net cash provided by operating activities totaled $2.2 billion in 2012 (compared to $2.1 billion in 2011.  For 2012, Macy's booked diluted EPS of $3.24, up 20% from the previous year.

Macy’s is in great shape to take advantage of JCPenney's weakness. The company has focused on three beneficial strategies since its 2009 reorganization.

The first is "My Macy's," a customer-centric localization initiative piloted in 20 selected geographic markets, which was designed to reduce administrative expenses, eliminate duplication, and help the company partner more effectively with suppliers.

The second is Omnichannel, a great initiative that reaches out to customers via social media, mobile devices, special events, concerts, and other online applications.

The final one is Magic Selling, which is centered in improving customers' experience by training associates and increasing their selling skills. All of these reasons confirm that this company has a lot of upside, as its stock performance reveals: Its share price is up 9.5% from April 2012.

What Will Newly Appointed CEO Ullman Do?

To fix its mess, JCPenney named Myron Ullman as its new CEO, restoring him to the seat he left in late 2011, after which Johnson took over. Ullman must now get JCPenney to turn a profit, after the company posted its sixth consecutive quarterly loss. Sales fell 25% in 2012, losing approximately $1 billion for the company. Ullman has experience running the company, and could restore it to stability by embracing the basic retailing methods Johnson shunned.

One of the measures Ullman will probably take to get back in track is the implementation of the previous pricing strategy he had before Johnson was appointed. Ullman's approach involved many promotions, price-focused ads, and marked-down prices; American customers expect discounts, especially in a recession environment.

Ullman faces a tough situation. Most of the senior employees he had around before Johnson was selected are gone or were dismissed. The man who orchestrated Ullman’s exit and later appointed Johnson was Bill Ackman, the founder and CEO of Pershing Square Capital Management. Ackman's firm holds a 17.8% stake in JCPenney, and is now implementing Ullman’s return. Ackman spent almost $1 billion acquiring 39 million of the company’s shares at a cost of $25.90 apiece. Pershing has lost approximately $500 million on that investment.

Will JCPenney Be Able To Recover?

There is almost no light at the end of the tunnel for the retail company. Its latest quarterly results give nearly no hint of the company’s envisioned turnaround. Its total sales were down 28.4% year over year. Same-store sales decreased 31.7%, even in a quarter containing Christmas. Its gross margin fell to 23.8%. And the company's EBITDA declined dramatically, from $1.3 billion in 2010 to a loss of $767 million in 2012. These results drove Standard & Poor’s to cut the company’s credit rating from B- to CCC.

The company is also facing a potential technical default on its 7.4% Debentures due 2037, as law firm Brown Rudnick is claiming that in behalf of its bondholders. Due to the company's high net debt to market value, it's unlikely that anyone could stage a leveraged buyout of JCPenney. Instead, the company's options include selling itself, or perhaps ultimately filing bankruptcy if things get worse.

It will be very difficult for JC Penney to recover. Based on a Credit Suisse report released in August 2012, which compared 17 troubled retailers that reported a 15% to 25% revenue decline in a single year (between 2000 and 2011), only four were able to recover: Abercrombie & Fitch, Barnes & Noble, Ann and Guess?. And it took an average of three years for them to recover.

JCPenney will have to accomplish the same feat, but in less time.


Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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