J.C. Penney: Should Investors Have Patience With CEO Ron Johnson
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you look at a one-year chart of J.C. Penney's (NYSE: JCP) stock price, you will note, rather disconcertingly, that it is not heading in the right direction. At the time of this writing, the stock was priced slightly below $20 per share. The 52-week high is slightly above $43.
What's the cause of this drop? Well, perhaps you've heard that J.C. Penney is trying to end the retail sales culture. I don't mean that the company is trying to end sales as in revenue, I mean sales as in this-was-priced-at-$100-yesterday-but-for-the-next-two-days-it-will-be-$50-after-which-it-will-be-$100-again.
I hate the promotional sales culture almost as much as I hated writing that huge multi-hyphenated word, statement, or whatever that was. The problem with a sales culture is that it is dependent on sales, and the problem with sales is that it leads to a lot of price discrimination and consumers demanding to buy something for less than it's worth at all times.
By now, most investors know the story. CEO Ron Johnson wanted to eliminate the retailer's dependency on sales discounts with a new "fair and square pricing" concept. For the most part, you pretty much knew what J.C. Penney valued an item at, and that you wouldn't have to worry about missing out on some greater, lower price. Consumers were confused, and same-store sales, the big metric when it comes to companies in this sector, took a hit.
But, should we blame Johnson and demand that he resign for what he's trying to do? I would argue that we shouldn't. I would argue for patience. Granted, you're probably going to need a lot of it if you plan on sticking with the stock. The way I figure it, either a JCP shareholder has already cashed out and harvested the loss or is now considering the retailer a very, very long-term holding (maybe there should be a few more years).
I've come to believe that retailers shouldn't play the price-war game. Or, they should avoid it as much as possible. There's certainly room for sales, but after a while, you begin to wonder whether discounting is preferable to sane, stable pricing strategies. Of course, this is easier said than achieved; even Johnson has been feeling the pressure as of late and has done what he can to be flexible with his pricing ideas during the competitive holiday season.
There's no question that consumers want value. But they don't just want a good price; they want everything. Greed isn't a concept solely for the Gordon Gekkos of the world, as some might believe; no, even consumers want more and more. They want no lines at the point of sale, they want a shopping cart when they arrive in the store even if the store is short on employees that particular shift, they want three associates at their disposal to check inventory and answer questions and carry their chosen items to the register, they want experts on every product they encounter even if it is obscure or novelty in nature (if you work for a place that sells Sea Monkeys, you better know the enzyme kinetics at play within the little shrimps' physiology or you'll be asked to get a manager)...and they want it all for a low price.
There's nothing wrong with a demanding consumer. But there's also nothing wrong with rebooting the system.
I like the way Johnson is at least trying to reboot the system and change J.C. Penney for the better. The one thing he shouldn't worry about is the stock price. I don't often say that, as I do believe execs do need to care about stock prices, at least to a degree, but in this case, there simply was no way to believe that altering a sales-promo cultural wouldn't cause havoc with the short-term chart.
Johnson should go further, though. He should also figure out what his store wants to be besides a saner place for pricing. Good customer service is a wonderful theoretical construct, but at the end of the day, customer service has to be defined with selective vision. You can't say, "we want to make each and every customer 100% satisfied." Instead, one should choose which dimensions of service to focus on and be the best at it. As an example, a CEO might want to focus on lines at the point of sale instead of having three associates at the call of a customer. A CEO might want to eliminate greeters at the door and other proactive service. My suggestion would be to see more quality reactive service in stores...i.e., don't try to help me and talk to me unless I talk to you.
Johnson will also need to up the ante as far as advertising goes. He needs to create advertising spots on television that better promote the notion that J.C. Penney is a fun place to shop. Create a connection with the consumer with powerful advertising to increase brand equity, but don't focus on the item selection -- remember, you could easily shop at Target (NYSE: TGT) or Wal-Mart (NYSE: WMT). Focus on the experience, on the difference between shopping at J.C. Penney and shopping at Target. Target and Wal-Mart are good at what they do, and are good on pricing...but if I can find something at all three concepts, give me a reason to shop at your store. Maybe it's your top-notch reactive customer service, who knows.
I personally think J.C. Penney is interesting at these levels, but I admit it is one risky play. One thing Fools like is positive cash flow, but the retailer isn't very Foolish at the moment. According to the company's 10Q filed in December, for the nine-month period, $655 million was used to fund operations as opposed to $133 million being needed for operations in the similar period one year ago. Target and Wal-Mart have better-looking cash-flow statements. Target generated $3.3 billion during its latest nine-month period, while Wal-Mart's nine-month cash receipts came in at almost $16 billion.
You're going to need patience if you go with Johnson's team. And I also have to admit something else: with Wal-Mart and Target, you are generating a dividend yield. Unfortunately, J.C. Penney had discontinued its dividend in 2012. Yes, to repeat, there is risk. Unlike Target and Wal-Mart, J.C. Penney just doesn't have that blue-chip safety.
I like dividends, but I also like this guy Johnson and his efforts at changing pricing. Some think he's crazy, but I believe he should be given a chance. If he ultimately fails, that's okay; attempts at innovation will oftentimes not work out. Sometimes, though, they do. And the cash flow eventually follows. J.C. Penney looks to me like it has a chance to climb back to at least some of its former glory over time. If that happens, if Johnson is right about how to deal with his customers and the perception of sales promotions, then investors may eventually be rewarded.
esxokm has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!