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Oracle for Back-to-School?

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

As retailers have already begun to gear up to compete for the expected $53.5 billion in consumer outlays for back-to-school shopping, Oracle (NYSE: ORCL) is not the first name that comes to mind. As a result of a recently announced partnership with J.C. Penney (NYSE: JCP), owning shares in Oracle may be a conduit to get forward-edge exposure to the retail space. The real advantage of this angle is that if the partnership yields positive results, Oracle will enjoy a first-mover advantage in the space. If, however, the results are not the boon that each company hopes, Oracle's enterprise business remains strong.

A Unique Retail Play

Within the past few weeks, J.C. Penney CEO Ron Johnson announced his company’s aggressive new plan to revamp its stores by completely eliminating cash checkout lanes by the end of 2013. As some evidence that the market is taking the news as a significant positive, one merely needs to look at the company’s recent earnings release. Despite announcing a 22.6% decline in revenues that swung the company to a second quarter loss, the share price rose on remarks made by Mr. Johnson: “We have now completed the first six months of our transformation and while business continues to be softer than anticipated, we are confident the transformation of J.C. Penney is on track. The transition from a highly promotional business model to one based on everyday value will take time and we will stay the course.”

The first step in J.C. Penney’s plan is the installation of a high-grade Wi-Fi network within stores that will allow sales associates to spend time on the sales floor. Anyone who has shopped at Apple (NASDAQ: AAPL) is familiar with the concept. Apple Stores are staffed with bands of roving “geniuses” that are able to help customers from introductory questions through completed sales. The mobile checkout model, made possible with the use of handheld point-of-sale devices, has been very successful for Apple. The completion of this step is targeted for later this fall.

The second phase of the plan is the introduction of a radio frequency identification (RFID) system by February 2013. The system requires every item in the store to be tagged with an RFID tag that is then tracked with a central computer. When a customer is ready to leave the store, the sale can be automatically tallied without the need for any additional scanning. Not only does this methodology eliminate the need for clerk interaction in the sales process, it has the potential to significantly reduce theft.

Finally, as the electronic-wallet becomes more popular, it may become possible for customers to simply walk out of the store and be charged through the e-wallet in their smartphones. While Wal-Mart Stores (NYSE: WMT) had indicated its intention to explore this technology within the last few years, it has yet to introduce it in any of its stores. A significant constraint is the fact that the cost of each RFID tag is between $0.07 and $0.10. At the razor thin margins utilized by Wal-Mart, this additional cost is prohibitively high. Mr. Johnson has indicated his belief that the apparel industry is more suited to the technology and is confident that the cost will be easily absorbed.

So Why Oracle?

J.C. Penney recently announced that Oracle would be its technology partner for the entirety of the transition, meaning that J.C. Penney’s complete retail platform will be migrated to an Oracle platform. This has the potential to give Oracle a significant first-mover advantage if the move proves effective. In addition to having the ability to point to a functioning example, the partnership will have had the opportunity to work through the kinks and bug that are inherent in the rollout of a new platform of this magnitude. As other retailers look to make a similar move, Oracle will be well-positioned to win new contracts.

Of equal importance is the relatively low level of risk that Oracle will be able to achieve in this project. If J.C. Penney’s transformation is unsuccessful, Oracle will still have been well compensated for its services to date. The risk is primarily in terms of opportunity cost, meaning that if RFID technology is not widely adopted, it is the potential of new business that is lost, rather than true investment capital.

Conclusion

While betting on retail through Oracle involves the patience to let the transformation play out, it has Oracle’s very strong enterprise business to mitigate a significant portion of the risk as J.C. Penney moves ahead. The retail sector is likely to be given significant attention over the next few weeks as competitors scramble to get ahead. Oracle is a unique way to gain exposure to this industry without wading all the way in to one’s neck.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Oracle. Motley Fool newsletter services recommend Apple. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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