J.C. Penney: Winning Strategy Makes This a Smart Play Now
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A New York State judge refused to issue a ruling that would have limited J.C. Penney's (NYSE: JCP) ability to sell Martha Stewart Living Omnimedia's (NYSE: MSO) products in its stores. While Macy's (NYSE: M) had claimed that “the agreement between J.C. Penney and Martha Stewart Living violates its own agreement with Martha Stewart Living,” the judge in the case, Justice Jeffrey Oing said that “he didn't feel it appropriate to hamper J.C. Penney from doing business,” reports the Wall Street Journal. “Macy's believes the agreement between J.C. Penney and Martha Stewart Living violates its own agreement with Martha Stewart Living.”
Macy's has already filed and been granted a preliminary injunction against Martha Stewart Living that would halt the sale of certain Martha Stewart products in J.C. Penney stores. While that decision is currently being appealed, “Macy's has been selling Martha Stewart wares in its stores for years and feels that Penney and Martha Stewart Living are overstepping their bounds by trying to put merchandise in Penney stores.” Macy’s first filed suit in January.
This may sound like a run of the mill lawsuit between massive corporations but the end result could make a huge impact. Ron Johnson, ex-Apple (AAPL) executive and current CEO of J.C. Penney, is trying to implement a new strategy to turn the company around. Johnson began his tenure at J.C. Penney by introducing a new fair pricing strategy which uses round numbers and lower overall pricing, as opposed to the company’s previous strategy which held prices at a higher level then offset those prices by having frequent sales. Now, he is trying to make J.C. Penney a destination shop.
Johnson is creating stores within stores, giving J.C. Penney customers a mall-like experience in which they can shop each particular brand separately. The strategy has been criticized by some, who say that finding a pair of jeans, for instance, is difficult because denim is housed in several different areas of the store. However, the strategy has some appeal for those that prefer a particular brand and, because customers are drawn around the store when, say, looking for denim, it exposes those customers to a wider range of wares than they would otherwise be exposed if all the jeans were in one place.
According to the Wall Street Journal, “Macy's spokeswoman Sharon Bateman said in an emailed statement the court declined to issue the injunction because J.C. Penney agreed ‘it won't sell Martha Stewart-branded merchandise in our exclusive categories as long as the (Martha Stewart Living Omnimedia) injunction is in effect....We expect to continue to exclusively sell Martha Stewart-branded merchandise in categories such as cookware, kitchen utensils, bed and bath for the term of our contract, which currently extends to January 2018."
This is a problem for J.C. Penney, which is currently looking for prominent names, like Martha Stewart, to add to its “store within a store” concept. In this instance, a name like Martha Stewart would add interest to its home goods department, which is currently the department store chain’s worst performing segment. It is also hitting Martha Stewart in that its merchandising component is the company’s “only business to reliably grow and book profits, while its publishing and broadcasting arms face broad advertising-market woes.”
While J.C. Penney’s issue currently lies in dispute, the stakes are high. Rival Sears Holdings (NASDAQ: SHLD), a founding member of the Standard & Poor's 500-stock index, is being booted from the index. “S&P said Sears's stock was ‘no longer suitable for the index, " reports the Wall Street Journal. “Once America's most iconic retailer, Sears will lose its place in the market measure because its ‘public float,’ or the number of shares that are in the hands of public investors, has hovered below a key threshold.” The S&P “added that recent news of a planned rights issue was the tipping point for knocking the retailer out of the benchmark after more than 50 years as a member.” The news came just days after “Sears's board approved a plan that grants shareholders the right to swap stock in hardware stores it plans to spin off.”
This means that “just one retailer that was a member of the original S&P 500... will remain after the Sears exit” - J.C. Penney.
The question is whether CEO Johnson has the moxie to see the transformation of the company through. Moreover, will there be enough meat on the bone if he does, or will J.C. Penney remain a shadow of its former self. I personally think Johnson has the chops to do this – he is, after all, the man behind the iconic Apple Store – but I question the timeline. Legal issues and their inevitable appeals take time – perhaps too much time for investors hoping to cash in on a J.C. Penney position in the next year or two.
I like J.C. Penney as a medium-term position. I think that the current economy, and its expected sluggishness over the next few years, make Johnson’s plan for J.C. Penney a win-win. Simple pricing and stores within a store – it is easy on accounting, easy to leverage (the stores within the store can always be shifted, minimized or expanded), and makes the shopping experience more personalized. I recommend investors buy in while the stock price is still unsteady thanks to the Macy’s lawsuit, then sit on the position for a couple years. I doubt the stock will enjoy much gains in the next year, thanks to lawsuits such as that filed by Macy’s and the current state of the economy. Likewise, I think that as a long-term position, J.C. Penney is bound to face issues – either from competitors copying its strategy or from other retailers suing the company like Macy’s did.
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