JC Penney's Metamorphosis
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Few things are as beautiful in nature than the metamorphosis that occurs for a caterpillar to become a butterfly. They start as something that many find unappealing. Then it goes into the pupa stage. It’s during the pupa stage that the caterpillar goes inside the cocoon. The cocoon doesn’t look like anything special. In reality it looks dead. But finally none other than a spectacular butterfly emerges, spreads its wings, and flies away.
JC Penney (NYSE: JCP) wants you to believe that this metamorphosis happens to businesses as well as butterflies. They would also like you to believe that they are currently in the pupa stage.
The analogy works out up till this point. They were a pretty unattractive caterpillar for a while. 2008-2010 saw net incomes drop from $1.11 billion to $249 million. That is what we call in economics “going the wrong way.” Now, under CEO Ron Johnson’s leadership, they have gone inside themselves to rethink what JC Penney is about. They are getting rid of all old inventories. The outlet branch of the business has been pruned. They even stopped marketing for a bit as they “reconsidered its approach to pricing and marketing…” This quarter was dismal on every metric. It’s not even worth elaborating what was down. It was all down. They were expecting things to be down, but they were even surprised how dismal things were. “…Business continues to be softer than anticipated…” That’s putting it lightly.
It’s Harder Than You Think
What JC Penney is doing sounds like a good idea. As numbers showed from past years, the store had largely lost its popularity. So reinventing themselves into a store people want to shop at again is a good plan. It’s just harder than you think.
One success story I thought of was McDonald’s (NYSE: MCD). Do you remember back in the 90’s when Mickey D’s was not really a preferred place to eat? People used to call it McNasty. Somehow the company started to clean up their image a bit. They got these hip urban (and sometimes cheesy) advertisements. They got the dollar menu. They changed their coffee from that McTerrible stuff they used to have to the McCafe which is really McYummy (ok, I overdid it). They turned it around from being the place you went when you were out of options, to a place people actually wanted to eat. This is reflected in the stock price over the past decade.
However, the business world is littered with failures. Netflix (NASDAQ: NFLX) thought it would be a good idea to take an extremely profitable and popular business, and reinvent it into a similar business, but different enough. That has been nearly a year now, and Netflix is still seeing the adverse effects.
Is JC Penney a McDonald's or a Netflix? I’m personally not convinced that we have a butterfly in the cocoon on the brink of emerging. The company reported a $147 million net loss for the second quarter (I think that might be because it’s been a couple months since my mom went shopping there but I digress…). Like I said, they were expecting a loss, but not that big a loss. They are six months into their restructuring, and already behind what they were planning.
The CEO was quick to say “…we are confident that the transformation of jcpenney is on track.” To me, it seems like you have to make that statement. I really doubt a CEO would say in a quarterly report “we are dubious we should have done this in the first place.” Of course they are confident. But in light of the present reality they have had to admit that support and growth for the company now probably won’t happen until the beginning of 2013.
Interestingly enough, the stock rose 5% with this quarterly report. Investors seem to believe that there is an imminent butterfly. (Although it may have been a short squeeze as well.) They may also be excited about a planned $1 billion in cash that JC Penney is expecting to have on the balance sheet by year end. They currently have over $800 million, but they didn’t outline how they intend to have over $1 billion. Doesn’t mean it can’t happen, just means I’m not sure what the game plan is.
We simply don’t know what awaits JC Penney. They are taking a necessary gamble in redoing the business. Investors, in my opinion, are taking an unnecessary gamble. I simply do not see enough evidence that this ship is getting turned around in the right direction. There was a lot of good talk in the quarterly report, but talk is cheap. We’ll just have to wait to see if and when the butterfly emerges.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Netflix. Motley Fool newsletter services recommend McDonald's and Netflix. 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.