Can This Retailer Turn Things Around?

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

With the holiday season around the corner, US department store chains are jostling to capture consumer’s attention. With the economy showing recovery signs, all retailers are anticipating an increase in sales. However, one retailer for which I think the picture will be still gloomy is J.C. Penney.

J.C. Penney posted disappointing 3Q12 earnings results with revenue down by 26.6% y/y to $2.93 billion. The stock is currently trading at $16.89 and has lost almost half of its value year to date. Some extremely bad decisions from management on pricing & coupons, increasing competition pressure, and plummeting customer satisfaction resulted in continuous price deterioration.

Company Analysis

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>EPS</strong></p> </td> <td> <p><strong>PEG (5 yr expected)</strong></p> </td> </tr> <tr> <td> <p><strong>J.C. Penney</strong>  <span class="ticker" data-id="204134">(NYSE: <a href="">JCP</a>)</span></p> </td> <td> <p>-2.39</p> </td> <td> <p>-0.83</p> </td> </tr> <tr> <td> <p><strong>Kohl's</strong>  <span class="ticker" data-id="204194">(NYSE: <a href="">KSS</a>)</span></p> </td> <td> <p>4.38</p> </td> <td> <p>1.16</p> </td> </tr> <tr> <td> <p><strong>Macy's</strong> <span class="ticker" data-id="203559">(NYSE: <a href="">M</a>)</span></p> </td> <td> <p>3.23</p> </td> <td> <p>0.9</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

Macy's recently reported its 3Q12 results, with net income up by ~4% y/y to ~$145 million. The company also saw sales increase by 3.8% y/y to 6.1 billion as a result of its better product offerings and expansion of e-commerce business. The company is planning to offer heavy discounts and attractive deals to enhance its sales in this shopping season. Also, its P/E of 0.9 among its peers makes it an attractive buying option at this time.

On the other hand, Kohl's Corp has been a winner for 'Black Friday' weekend sales over years. With the shopping season around, the company has a huge opportunity to make up for its previous loss in sales. Kohl's has been recently focusing a lot on price reduction and also included a few exclusive brands from Jennifer Lopez, Marc Anthony, and Rock & Republic. It will also offer 'Early Bid' specials this holiday season to boost sales.

Seeing better performance from competitors, J.C. Penney is placed in a weaker position with its negative EPS & PEG and I see this as a blockade for prospective investors. While its peers are trading at an average of 5.7 EV/EBITA, Penney is trading at 17.96 EV/EBITA. I see no point for investors buying such an overvalued stock at this time.

Despite various new product initiatives & promotional strategies, the company is not able to improve its sales. To regain the investors’ faith in the company and to boost up its sales, the management is trying out various initiatives such as 'everyday low pricing', 'black Friday sale' & 'shop-within-stores' which I have discussed in detail below. However I don't feel confident whether these moves will be able to turnaround the company. 

1. Getting Rid Of Coupons – A failure!

The company's move to eliminate coupons in early 2012 has been a strong factor behind its poor performance. Since then, the company has continuously posted huge declines in sales figures showing the customer's disappointment with this particular decision by the company. The company also started the concept of 'everyday low pricing' to replace coupons and also annual ‘sales,’ but even then it failed to grab market share in its core markets, and on the contrary, it lost a major chunk of its female customers (traffic declined ~12% y/y in 3Q). Though the company is again planning to fall back upon its coupons policy (by reintroducing the $10 coupon) to regain its falling customers loyalty, I don't see huge potential in this move. Its competitors are already offering better options, such as Macy offering 20% off coupons. Additionally, I think for the customers to turn back to J.C. Penney, they need a better drive.

2. Black Friday sale

JC Penney has decided to have its only sale for the year at 6 AM on Black Friday, shooting for higher traffic this year. Despite strong promotional activities by the company for its Black Friday sale, I expect increasing sales to be a challenge as its competitors are opening the stores even earlier. Macy’s & Kohl’s will open its stores at midnight, which definitely will lead to traffic deviation to other stores. I highly doubt the company will be able to generate the expected revenue from this sale.

3. The Transformation Policy

With its mounting losses & falling revenues for the fifth consecutive quarter, J.C. Penney is struggling to revamp its sales. The company's plan to develop 'shops-within-stores' started in 1H12 and it expects all of its 1100 Penney locations to be divided into individual branded spaces by 2015. But, this plan has not been able to achieve the desired results so far as it has failed to increase the traffic & gain the lost customer confidence. I don’t see a lot of scope in this plan as it clearly lacks the core areas of promotion & pricing where its competitors are gaining. On the other hand, this policy only focuses on changing the layouts of the stores which would result in more confusion among its customers.

Considering the already existing macro-economic factors, there is already a huge pressure on the company's profits with rising costs & the saturated level of prices which cannot be increased further. With major policy failures and a gloomy financial outlook I don't anticipate an upside potential in the stock, unless immediate new efforts start giving positive outcomes. Looking at the execution risks of the policies, I would rate this stock as a sell.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T.; 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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