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Do 3 Lefts Make a Right for J.C. Penney?

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Transition isn't an easy thing. Just ask J.C. Penney (NYSE: JCP  ) shareholders, who have seen their company's stock price vacillate wildly over the past year in the hopes that the ailing retailer can right the ship.

But as with all transitions, it's never as easy as just making a right turn to get on the right path. No... in J.C. Penney's case the company is making three left turns to get back on the "right" path. Confused? Let me explain.

Left No. 1:
Ron Johnson left his position as president of Apple's (Nasdaq: AAPL  ) retail operations to head J.C. Penney last year. Mr. Johnson seems like a perfect fit for the job given that both he and his new president, Michael Francis, whom he recruited from Target (NYSE: TGT  ) , completely reinvigorated the Target brand in the 1990s and made it cool to shop there again. As for Apple's retail locations... they're only the most profitable store per square foot in the United States. I'd say his ideas worked pretty darn well.

Left No. 2:
The company announced in late January that it had left its previous pricing strategy in its past, and that it was going to alter its approach to pricing immediately. The new approach entailed offering everyday low pricing with occasional clearance sells on certain merchandise on the first and third Fridays of the month. The goal is to entice customers not to hold off on their purchases and to get them to recognize that every day offers them great values. That's a tough order for a customer base that was used to receiving huge discounts and multiple coupons in the mail for Penney's 600-some previous annual sales.

Left No. 3:
The company left its profitable ways in the dust -- at least for the meantime. Mr. Johnson has been candid in his assessment that a turnaround would take time and that not all of Penney's customers would be receptive to the company changing a pricing tactic that hadn't changed for generations. Based on comments from Macy's (NYSE: M  ) chief financial officer, Karen Hoguet, last week that its stores are taking market share from Penney's, it's clearly not an overnight solution.

The stoplight
The problem with making three left turns is that you're bound to hit three lights along the way. Last night J.C. Penney encountered that first red light when it reported nothing short of disastrous first-quarter results.

Wall Street had expected the company to report an 11.4% drop in comparable store sales for the quarter. The actual results demonstrated a much steeper 18.9% drop in sales as many consumers simply didn't venture into Penney's now sale-less stores. Whether it's a breakdown of communication or a resistance to change doesn't matter; the company posted an adjusted net loss of $55 million and that's all investors care about.

To make matters worse, J.C. Penney announced that it would be indefinitely suspending its quarterly dividend of $0.20, which should save the company $175 million annually.

When to hit the gas
So is it time to hit the gas? Maybe...

Ron Johnson is a miracle worker, but trying to raise the dead is a completely different task. Penney's growth model was broken when it was offering huge discounts, so it's going to take an inextricably long time before we see real results from its new pricing strategy. It also isn't helping that with Sears Holdings' (Nasdaq: SHLD  ) clothing growth stagnant, Penney's hasn't been able to lure customers away from that struggling retailer and into its stores. Instead, upscale vendors Macy's and Nordstrom appear to be gaining customers at both companies' expense.

The exceptionally warm weather across the U.S. is another missed opportunity. Warmer weather should have resulted in more shoppers in its stores, but instead, its new pricing strategy seems to have kept shopping elsewhere.

Yet despite all this, I believe that Ron Johnson's vision will eventually succeed. That isn't to say there won't be red lights, flat tires, and slow drivers in J.C. Penney's path, but its focus on moving higher-margin merchandise and creating a store-within-a-store branding platform should prove to be successful enough to get Penney's back on the right path.

Patience, my friends... patience!

Disagree with me? Tell me about it in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He admits to being a terrible clothing consumer. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of, and creating a bull call spread position in, Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that's always the right price: free!

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2012, at 4:48 PM, GGmama wrote:

    I am a long-time, loyal Penney's customer, but am becoming more and more "disenfranchised" (no pun intended) with the store. The new advertising is classy, but looks expensive. The prices are still good, but costume jewelry stock in my Meford OR store is very stale. The latest "new policy" of allowing store employees to "dress down" EVERY day (including denim) may be the breaking point for me. No wonder Macy's is seeing more former Penney's customers. I don't love Kohl's but may be checking them out more often too. I've always tried Penney's first, which means they get most of my money, but that may change because I don't have time to "shop around". Best of luck Mr. Johnson!!

  • Report this Comment On May 19, 2012, at 3:24 AM, classicshar wrote:

    Not only has JCPenney and Mr. Johnson missed the mark, but this author also! The simple fact is that all of the advertising is a it never describes who JCP is, or what they do (sell) or what they sell, etc. It is so esoteric, that it is non-descript. As a result, anyone who sees it and does know 'who' they are and what they 'do', is saying' "What the heck is this!?"

    The branding company should be fired...not the pricing concept.

    Simple question: Who do you want to be and what do you want to sell, to whom? Answer that, and get the branding/marketing on target, and they'll be fine. Their merchandise usually spoke for itself.....until they abandoned their core...great soft goods!

    I miss the original JCP; we need their products, quality and , yes, trusted stores. We don't need vague, non-descript, quirky ads, that say nothing and make us wonder 'what's up'. Try straight talking/ads.

  • Report this Comment On May 22, 2012, at 1:10 PM, meminvestor wrote:

    i am obviously in the minority but agree with the author - i believe it will work. my wife - a self acclaimed clothing snob - would not have been caught dead in a JCP prior to the changes. Now, she has numerous outfits from JCP and tells everyone about them. From sephora make up to nicole miller clothing, she has bought it there. she was one of the first to find the new clothes at target 10 or so years ago. she also helped me get invested in TJX and DSW early on. i guess i am betting on the same thing happening again. that being said, even by her own admission, the clientele has not turned over and that will probably be what it takes to get the SSS moving

  • Report this Comment On May 27, 2012, at 1:45 PM, bobbyk1 wrote:

    Im not a big spender on clothes and the like but I personally like JCP change.I really feel insulted by marked up merchandise on sale at 70% off.Wow what a deal.Might take a little time but after a few misses I think people will gravitate to JCP.Go but a shirt at Kohls and every one will be 30/50% off.When dont they have a sale?

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