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Why JCPenney Will Come Back

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Rome wasn't built in a day, and no one said JCPenney's (NYSE: JCP  ) turnaround would happen overnight either. Since Ron Johnson took the helm back in January, shares have been sliced in half and currently sit near 52-week lows. His tenure began with much fanfare, and why shouldn't it have? The man led Apple's (Nasdaq: AAPL  ) innovative and much-imitated retail strategy, praised for its sleek layout and mobile cashiers. If there's someone who's qualified to turn around a struggling retailer, it would seem to be him.

JCPenney doesn't make an iPhone or an iPad, obviously, so this will be a much greater challenge for Johnson. Investors were coldly reminded of this in its last earnings report when the company missed on the top and bottom lines, and same-store sales dropped by a whopping 19%. The stock plunged about 20% in one day as a result.

Wall Street had already begun writing the venerable retailer's obituary, dismissing Johnson's rebranding strategy, saying the move away from sales and discounts to everyday low prices was driving customers away. But turnarounds take time, as Johnson's recent steps in the rebranding campaign remind us. Just in the last week, the chain has made some bold moves that should pay off in the long run. Let's take a look at what's going on here.

Focused on the next generation
Nearly every facet of Johnson's rebranding campaign seems geared toward a younger demographic, revamping the staid retailer in the process. Its latest bold move is a partnership with Canadian "fast-fashion" chain Joe Fresh, whose low-priced wares will be sold in 700 JCPenney stores. The move is similar to partnerships Penney's has formed with Sephora and Mango, and follows last week's announcement that the retailer would be working with fashionista Nina Garcia, the fashion director at Marie Claire magazine, and a judge on the show Project Runway. Garcia will advise the merchandise and design team on styles and trends in the fashion industry.

Just last week, she single-handedly sent JCPenney shares up 10% briefly when she tweeted about the chain's new look after a visit to a store prototype, calling it a "game-changer."

And the retailer isn't just making moves to update its fashion line. Johnson's team is taking a number of steps to make operations more efficient and cut down on costs. First, he's pulling a page out of his old employer's playbook by eliminating cash registers, using a mobile checkout strategy that will rely on an advanced wi-fi system and RFID (radio frequency identification) to manage inventory. Johnson believes the strategy could save his company $500 million by avoiding traditional checkout transactions.

Embracing new technology has led to advantages at a number of other clothing chains. German retailer Kaufhof has used RFID not just to track inventory, but also to make recommendations to customers with a "smart mirror" in the dressing room outfitted with an RFID reader that shows the visitor complementary clothing choices. The system also include "smart shelves" that can tell the customer what sizes and colors are available.

Retail juggernaut Zara has also made itself a leader in fast fashion by outfitting store-level staff with handheld computers so they can quickly communicate with headquarters about orders, sales trends, and customer reaction to new items. It's an important part of a strategy that has made it the envy of its competition, and one reason why it can design, produce, and bring to market a new garment in just 15 days.

All of these decisions point to a strategy of targeting a younger audience, a wise move for a tired brand that drives too much of its business from coupons and discounts. While trying to emerge as a fashion forward retailer, JCPenney is also pushing the envelope in its marketing strategy. Consumers have witnessed a more a more progressive, gay-friendly approach, featuring comic Ellen DeGeneres as a spokeswoman and an ad with two gay dads ahead of Father's day.

No place to go but up
After losing nearly half its value, the stock presents a compelling value for investors who believe in the turnaround story. Its price-to-sales ratio is about half that of rival Macy's (NYSE: M  ) , and like Sears Holdings (Nasdaq: SHLD  ) , an argument can be made for its value being in its real estate. Sears stock has jumped about 70% as it's spun off some of its real estate holdings, unlocking value for investors in the process. As of 2010, JCPenney owned 41 million square feet of retail space as well as 11.2 million square feet of distribution space, not to mention the headquarters site with 240 acres surrounding it. At a market cap of about $5 billion, the price of the retail space alone is just $125/square foot -- not so pricey considering much of that is valuable mall anchor space.

Renowned hedge fund investor Bill Ackman, whose firm holds a large stake in Penney's, has made this argument as well, claiming that the value of its real estate is $11 billion.

The company admitted its pricing strategy was flawed last week when it decided to bring back clearance sales, but I'm betting Johnson and his team are clever enough to revive the ailing retailer one or way another, and if not, there's always the real estate option. I've decided to make a bullish CAPScall on JCPenney. I think it will outperform the market in the years to come. 

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Fool contributor Jeremy Bowman owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not 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 (2)

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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 30, 2012, at 6:55 PM, Zankudo wrote:

    No, he screwed it up. Just ask the coupons, no go to JCP. The problem becomes evident now that I understand he came from Apple. What is done in Apple needs to stay there. Running around with pay point iPhones and doing away with cashiers..not a good idea. Doing away with the coupons and the sails...not a good idea. Before you re-invent the wheel you need to see if it is rolling along pretty well..and it was. Some things don't need fixed, like a Big Mac...get the picture.

  • Report this Comment On August 01, 2012, at 4:46 PM, ladysherricamo wrote:

    This store is a joke. It is a old dirty store and the company doesnt know how to treat its associates with respect anymore. There is also asbestos in many of the JCP stores due to the fact most of the buildings are old. Be aware because asbestos is a dangerous substance that can cause many different medical problems and known to cause cancer too. I believe the company should bring this to customers attention but they wont because they are selfish and all they want to do is make money.

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