Is J.C. Penney Worth the Wait?

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

J.C. Penney (NYSE: JCP) CEO Ron Johnson has been very candid about the extended nature of the turnaround plan he is attempting inside of the struggling retailer. As the quarters tick by, however, and the numbers continue to languish, investors are beginning to wonder how long they will need to wait and if such a wait is worth leaving scarce investment dollars exposed to the ambitious, if not somewhat amorphous, plan. Overall, while I would not suggest making J.C. Penney a core holding, Mr. Johnson’s vision is compelling; if it works, you will be well rewarded for patiently keeping a small allocation to the stock.

The Plan

There are a few central features of the J.C. Penney turnaround plan that make it both slow and intriguing. Prior to joining Penney’s, Mr. Johnson was a driving force in the design of the very successful Apple (NASDAQ: AAPL) Store retail locations. An integral feature of what Mr. Johnson refers to as the “new JCP,” is a sales staff that actively interacts with customers on the sales floor, similar to how Apple does things with its Genius Corps.

This shift is both a philosophical one – the belief is that by more actively interacting with customers, the new JCP can become a value-added shopping experience – and a technological one – the company has partnered with Oracle (NYSE: ORCL) to bring cutting-edge mobile point-of-sale technology to the new stores. Oracle has made significant strides in creating handheld sales devices – again, like the ones you may have seen in the Apple Store – to help Penney’s realize its plan.

The other critical element of the turnaround plan is the creation of small shops-within-stores. Each shop has a specific brand or celebrity focus, including such themes as Levi’s, Martha Stewart and Michael Graves. Overall, Penney’s plans to include as many as 100 of these shops inside its 700 largest retail locations. Small town stores are getting a slightly different look that will include such features as coffee and ice cream bars on the “streets” – extra wide aisles – at those stores’ perimeters; they will also include a “town square” in the middle of the store that will promote various activities.

The Numbers

Despite another disappointing quarter, the retailer reports that converted “shop” space has returned more than double the per-foot revenue as compared to the rest of the store, coming in at $269 per square foot. For the most recent quarter, revenues fell by 26.6%, same store sales fell by 26.1% and the company lost $0.56 per share on a diluted basis; J.C. Penney lost $0.67 per share in the same quarter a year earlier. Mr. Johnson acknowledged that the loss was expected, but that such operating results could not persist: "Job No. 1 is to return to growth next year. Let's make no mistake about it. This is a year where we said we are willing to let the sales drop to establish a new base for the new JCP. We have to return to growth."

Structural Change

Another critical element in the turnaround is the attempt by Mr. Johnson to guide the company away from a sale and coupon culture. The company’s core customer base has not reacted well to the move, which has caused Johnson to alter his approach on multiple occasions. Most recently, as reported on CNBC, he sent a letter to customers explaining the shift to an “everyday value” approach, including a $10 “gift,” in the letter. While the non-coupon gift that walks and talks like a duck is quacking away, the move shows the type of flexibility that may be needed to pull off the transition.

At the core of the challenge is to either get Penney’s existing customer base to think of the store in a new way, or, more likely, to attract a new base of customers. While there is some overlap, generally the customer who appreciates the forward-thinking, technology-driven, boutique approach is not the coupon toting saver that has been waiting three weeks for a killer sale to finally buy whatever he or she has been eyeing on the shelves. The former is likely a higher-margin customer, but unless he or she comes into the store, the new JCP will never turn the corner.

Overall, Mr. Johnson’s vision is a great one, but it requires some real patience on the part of shareholders. While I would not own shares in my core portfolio, if the new JCP gains traction, it could be very successful. In this spirit, a small, speculative allocation is appropriate.

dsewrites 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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