Is it a Good Time to Invest in JC Penney?
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The night is darkest just before the dawn. But, it still remains unclear whether the darkest phase is over, or if an even darker period awaits American retail company JC Penney (NYSE: JCP). It is now likely that JC Penney’s sales are even worse than the first quarter’s disappointing sales decline of 20.1%. The company is struggling with its marketing program to clearly communicate the new pricing strategy to customers and drive traffic to the stores. A combination of poor messaging, tampering with the merchandise flow and a slowing of the overall retail environment seems to have contributed to the current state of business. Add to that the disappointing news of the departure of President Michael Francis from the company last week; it seems the company’s troubles are not over, at least not in the near future. Mr. Francis was the second executive in command as the company’s new concept and strategy began to unfold last year. He also came at a significant cost to the company ($10 million), especially considering the short tenure of his stay (9 months).
In the first quarter, the company reported a 20.1% decline in sales and a loss of $.25 per share. The company reported highly disappointing same store sales and internet sales. With same store sales down 18.9% and internet sales down 27.9%, the company is neither gaining/retaining customers in the store nor capturing the expanding online market. Even for the other struggling retailers, like Wet Seal Inc. (NASDAQ: WTSL) and Kohl's Corp (NYSE: KSS), both these numbers are not as bad. Moreover, JC Penney had to shoulder a 3% year over year decline in gross margins to get these results.
Ron Johnson’s plans sound good in theory. The company has completed the home office restructuring that began in April. JCP eliminated approximately 350 positions at its headquarters. The savings generated by these actions will contribute to the company's previously announced expectation to achieve an annual run rate of approximately $900M in expense savings by the end of 2012.
We also like the idea of shop-in-shops but remain unclear about the logistics of the transition. At first look, the ongoing construction in stores is very distracting to the customer and detracts from the look and feel of the store. At the same time no efforts have been made to make customers believe that something exciting is coming. Going forward, we believe the company needs to improve the store appearance during what will be a very long transition period into shop-in-shops. Also, the executions of some other plans have not progressed smoothly so far, including the company’s misjudgment of marketing and pricing.
Although the stock has traded off significantly, we believe that it lacks a near-term positive catalyst. We are waiting for signs that the transformation of J.C. Penney is gaining traction. With less than 6 months from the launch of this new strategy in Feb’12, we remain watchful of the uncertainty of re-educating the customer, as well as of the transition needed with this new strategy. As of now, we recommend avoiding JC Penney shares.
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