J.C. Penney: By the Numbers and Beyond the Numbers
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ron Johnson assumed the helm at J.C. Penney (NYSE: JCP) one year ago. There was a high level of enthusiasm when Johnson joined the struggling retailer. Many hoped that he would be able to bring some of the magic he helped create at Apple over to JCP. Unfortunately, the magic hasn’t materialized yet.
There are two perspectives on Ron Johnson’s leadership at JCP over the last year. One viewpoint is to grade him strictly by the numbers. A second perspective is to evaluate his performance based on the long-term strategy that he has put into place. Let’s look at both.
By the Numbers
Simply put, the numbers put forth by JCP over the last year are horrible. Revenues in the most recent quarter were down 20% from the same quarter in 2011. Earnings were down over 360%. Gross margin was down from 40.5% to 37.6%.
There are other numbers that stink, too. Traffic was down 6% Monday through Thursday. Weekend traffic was down 12%. The average spend per visit last year was $47.79. The same metric this year is $45.66, down by 5%.
A year ago, JCP shares traded around $34 per share. Today, the stock is around $24 per share. That represents a loss in market cap of well over $2 billion.
It would be easier to swallow such bitter-tasting results if other major retailers had suffered miserably as well. But they didn’t. While JCP languished, competitors such as Dillard’s (NYSE: DDS), Kohl’s (NYSE: KSS), Macy’s (NYSE: M) and Saks (NYSE: SKS) performed okay for the most part. Here are their numbers for comparison:
|
Company |
Revenue Growth (Most recent quarter year-on-year) |
Earnings Growth (Most recent quarter year-on-year) |
Stock Price Growth (6/11 vs. 6/12) |
|
J.C. Penney |
(20.1%) |
(368%) |
(29%) |
|
Dillard’s |
5.6% |
23.9% |
33% |
|
Kohl’s |
1.9% |
(23.4%) |
(12%) |
|
Macy’s |
4.3% |
38.2% |
33% |
|
Saks |
3.8% |
13.2% |
(1%) |
Dillard’s and Macy’s had good results over the last year. Kohl’s and Saks weren’t as strong, but neither company fell apart in the manner JCP did. JCP’s numbers were entirely due to JCP and not any overall market troubles.
Beyond the Numbers
A cornerstone of Johnson’s strategy at JCP is to move from traffic driven by coupons and special promotions to an everyday low price approach. Another key element in the new JCP strategy is the “store-within-a-store” concept. Under this concept, vendors would be able to open up their own boutique-style stores inside a JCP store.
Bill Ackman, whose Pershing Square hedge fund owns a significant stake in JCP, has an interesting perspective on JCP’s strategy. Ackman sent an update to his hedge fund investors this week where he used an analogy about JCP. He compared JCP to a mall that has seen better days.
The current tenants in the old mall sell a lower quality selection of products. Coupons and special sales were the only way to drive traffic to the mall. But this approach is experiencing diminishing returns, with sales declining each year. Worse, the approach has somewhat of a stigma that is preventing the mall from attracting top-tier tenants.
To escape the downward slide, a new mall manager is hired. This new manager launches a re-branding project for the mall. He does away with the old coupon approach and sets his sights on attracting great tenants. Plenty of high quality tenants line up to open their stores in the new mall as a result. A grand opening for these new stores is planned for the fall of 2012. However, in the meantime the discontinuation of the coupons has caused a slowdown in traffic and sales for the older tenants.
Ackman’s analogy is intriguing. If he is right, the poor numbers seen thus far under Johnson’s reign are temporary. He thinks a major culprit for the results being as bad as they were is was that the marketing for the new strategy was not as effective as it should have been. Ackman told his investors that Johnson and team are working to fix the message and he expects they will get it right.
There are some numbers that back up Ackman’s take. JCP’s store-within-store results with Sephora saw sales of more than $600 per square foot, compared to about $150 per share foot for the rest of the JCP store. Customer satisfaction surveys and brand perception studies conducted by JCP are also showing improvement.
JCP owns 49% of its properties. The rest of its properties are leased at around $4 per square foot. If the company experiences similar results with the 10 reported stores-within-stores launching in a few months as it did with Sephora, the return per square foot will be very impressive.
Fair and Square Deal
So what are investors to make of all the tumult at JCP? On one hand, it seems foolhardy to put money into a company that looks to be in a downward spiral based on its financial numbers. On the other hand, the strategy that Ron Johnson is implementing could have solid potential over the long run.
Probably the best idea of a fair and square deal for JCP stock is to give Johnson’s strategy a little more time to take hold. But I recommend waiting until we see the quarter results after the fall launch of the new stores-within-stores. If these results look positive, the numbers from last year could fade from memory. And Ron Johnson will deserve a wizard’s hat instead of a dunce cap.
Keith Speights (www.keithspeights.com) has no positions in the stocks mentioned above. The Motley Fool owns shares of Dillard's. 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.
