Should J.C. Penney Get the Benefit of the Doubt?

Where's the Apple magic? That's the question J.C. Penney (NYSE: JCP  ) investors must be asking by now. When the tech giant's former retail chief, Ron Johnson, took over as CEO of the department-store chain late last year, he didn't come alone: He brought a lot of high hopes with him.

Seven months down the line, the excitement has fizzled out, and everything seems uncertain. Two out of the three areas that were a part of the turnaround strategy -- new management, new pricing strategies, and new concept stores -- are already showing signs of stress.

A string of bad news
It all started with miserable first-quarter numbers. All eyes were on the retailer's quarterly results as a barometer of whether Penney's new pricing strategies were finding any takers. The answer was an emphatic no.

Customers who had become accustomed to Penney's double advantage of deep discounts and coupons weren't pleased with their sudden vanishing act, as Johnson replaced them with everyday low prices and occasional clearance sales. Penney's same-store sales stumbled 18.9% while its rivals benefited.

But even though Macy's (NYSE: M  ) has effectively acknowledged gaining from Penney's "non-promotional price streamlining," the company doesn't really believe its customers are running away. Johnson thinks Penney's new deals weren't being communicated effectively to customers. I can't say he's entirely wrong: I felt confused by terms like "month-long values" and "Best Price Friday" when I went to shop at Penney. It's not a big surprise that the man behind the retailer's marketing efforts, President Michael Francis, has left the company.

Francis' exit has further shaken investors' confidence in Penney's management. He was considered one of the prized executives whom Johnson had roped in to help him turn the company around. Snagging Francis looked like a wise move at the time, as the two had previously worked together to take discount chain Target (NYSE: TGT  ) to new heights.

Steep hill to climb
I think the company's hopes are now pinned on the revamped Penney stores that should crop up in a few months. The mini-town shopping concept that will entail stores-within-stores and house as many as 100 brands sounds at least interesting. The company has already signed on some big brands -- Nike, Puma, and Levi's to name a few. Pacts such as the one it signed with Martha Stewart Living Omnimedia (NYSE: MSO) is another tool Penney can use to take Macy's head-on.

Will Johnson's Apple Store magic will work for Penney? It won't be an easy task, as rivals are catching up fast. Target is also going the "store-in-a-store" route and rolling out specialty shops -- but remember, Target also sells Apple products, which by itself is a huge advantage. Close rival TJX (NYSE: TJX  ) , meanwhile, is treating customers to an increasing number of high-end luxury brands. TJX's forte lies in its deep discounts -- a strategy that Penney has done away with even as it works wonders for TJX -- the company beat Street estimates in its first quarter.

The Foolish bottom line
This is a tricky situation for Penney. It won't be paying a dividend anymore, as it needs cash to convert its huge transformation plans into action. Investors who are willing to forgo dividends and keep faith in the company are waiting to see Johnson deliver, but Francis' exit has just made things seem a little tougher.

Fool colleague Shubh Datta is willing to give Johnson the benefit of the doubt. Sure, you can't just write off the man behind the Apple stores so soon, but I'm wary. I think I need one no-nonsense quarter and some positive customer feedback before banking on Penney. What's your call? Let us know in the comments section below.

In case you're tired of fussing with turnaround stories, download a copy of our latest special report, "The Motley Fool's Top Stock for 2012." You'll be privy to the top pick of our chief investment officer, a stock dubbed the "Costco of Latin America." This report is free for a limited time, so don't miss out!

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Costco Wholesale and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Nike, and Costco Wholesale, creating a diagonal call position in Nike, and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (1)

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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 July 02, 2012, at 1:10 AM, MosheKaye wrote:

    In retail revenue comes from more customers or from more $ per customer. As an investor in this sector the question I ask myself is what differentiates JCP from her competitors?

    Is she physically bigger than Wal-Mart, Target or Macy's? No.

    Is she less expensive? No.

    Does she offer brands/products/services that the others do not? No.

    Does she offer better customer service? Debatable but i would say No.

    Does the JCP name generate any coolness factor in her customers? No.

    Can she turn around...sure....but how?

  • Report this Comment On July 02, 2012, at 10:18 PM, Dbolander wrote:

    Neha Chamaria like other Fool writers suffers from amnesia. Apple’s turn-around did not occur in 7 months. In fact Steve Jobs came back to Apple in 1997. Apple didn't consistently turn profits until about five years later. Thank God people like Neha are left to write quickly forgotten columns rather than run large companies. Armchair pontificators are so frequently incorrect. Investors would do well to buck up and ride this one through. This is a large company in decades-long decline and it will take more than a year or two to stop the bleeding.

    JCP’s real problem is they lack a true value proposition. Without making unique products, there will be a lot of struggle to turn it around.

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