Have an Opinion on J.C. Penney? Join the Club

There's certainly no shortage of news coming from the J.C. Penney (NYSE: JCP  ) camp lately. The long-awaited investor's day, Sept. 19, hosted by CEO Ron Johnson, added fuel to what was already a decent-sized flame. How topsy-turvy is the action surrounding the former king of the retail industry?

A few notable examples: An analyst lowers his rating on J.C. Penney citing concern with the transition strategy and effectiveness; on the same day another raises it -- for the same reason. Investors listen with bated breath as the CEO shares his vision, initiating a spike of 12% in share price -- followed by a nearly identical drop the following trading day. Not to be outdone, options traders are running amok, with nearly three times as many betting on a decline in the recent share price.

The gist of the arguments -- for and against
If you don't follow J.C. Penney closely, you may be surprised to learn shareholders have enjoyed a stellar two-month run. Since the stock bottomed out at $19.25 a share on July 17, it's up about 37% -- and that's taking the drop on Sept. 20 into account. Not bad.

Supporters of a successful turnaround hang their hats on a few things.

There are a number of analysts and J.C. Penney insiders in Johnson's corner as he attempts to rebuild it from the ground up. Within the past two weeks, analysts from Oppenheimer and JPMorgan Chase have reiterated their respective versions of a "strong buy" rating. Oppenheimer analyst Brian Nagel's opinion is indicative of how disparate the views on the company are. His take on why all those selling J.C. Penney short are wrong goes something like this: The poor results to date are indications of how aggressive the changes at the company have been.

Hedge fund manager Bill Ackman -- an owner of nearly 18% of J.C. Penney's outstanding shares -- continues to exude confidence in Johnson's vision. With nearly $18 billion under management, Ackman's a pro and has to know what he's doing, right? Of course, with so much at stake, it's not unseemly to suggest Ackman may have an inherent bias.

Proponents will also point to the success of J.C. Penney's new stores as justification for their bull sentiments. According to Johnson's discussion on Sept. 19, the store-inside-a-store concept, featuring aisles five feet wider than in its traditional stores, are performing at a clip 20% better than J.C. Penney as a whole. The exclusive arrangement with Disney to open up shops within the "new" J.C. Penney announced on Sept. 19 didn't hurt, either.

But the turnaround has as many, if not more, detractors than bulls. As my colleague Rick Munarriz points out, the positive sales results J.C. Penney refers to are skewed, to say the least.

Then there are the analysts negative on the company. Shortly after Oppenheimer and JPMorgan were sharing their feel-good news, Zacks and Piper Jaffray both lowered expectations to $26 and $25 a share, respectively. And you can toss in the aforementioned negative options trading, to boot.

Finally, as all Fools know, no investment decision should be made without a review of the fundamentals. What's intriguing regarding J.C. Penney's numbers -- and the bulls may have an argument here -- is that it's priced like an upstart retail chain just out of the blocks. Surely, you'd get no argument from Johnson, who is the first to acknowledge that's about right.

Thing is, J.C. Penney is trying to execute a turnaround for the ages, not secure real estate, hire thousands of employees, and address the myriad other responsibilities a true retail start-up endures. Though some leeway is acceptable given the timing of the transition, comparing fundamentals is warranted -- and they paint a dire picture.

Macy's (NYSE: M  ) and Nordstrom (NYSE: JWN  ) are what the new J.C. Penney strives to be when it grows up, while Kohl's (NYSE: KSS  ) provides a better comparison based on where J.C. Penney is today. The problem is, on virtually any fundamental basis, J.C. Penney isn't in the same universe as any of them. Macy's and Kohl's generate sales-per-square-foot 30% and nearly 50% higher, respectively, than J.C. Penney.

Gross margins can't compare with either Macy's or Nordstrom's, and all three competitors provide shareholders with a 2% (give or take) dividend yield. Obviously, J.C. Penney isn't in a position to compete on an income basis right now. If positive cash flow does return, it has more than enough costs ahead of it to absorb before paying shareholders.

Since J.C. Penney is all about opinions, here's another: Based on feedback from avid shoppers, the "new" J.C. Penney is working. And you know what? I think Johnson and the team will succeed, too -- eventually. The good news for investors is there's no hurry, one way or the other.

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Fool contributor Tim Brugger currently holds no securities positions mentioned in this article. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com. 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.


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  • Report this Comment On September 23, 2012, at 12:27 AM, darlinrose wrote:

    Odd that the little old ladies are what made Penneys and now they want to exclude them. Guess the recession and stupid earlier move to exclude sales and promotions had nothing to do with the losses they have experienced. I am sure that these new style stores may be appealing to some, but will be expensive, or due to not accepting credit cards without setting up an account before hand will make for another downfall.

  • Report this Comment On September 23, 2012, at 2:47 AM, angela2u2 wrote:

    been in retail sales over 35+years in major elite store ex. macy by appointment, imagnin, saks fith ave, bloomingdales, i know that knowledge and people person is very important for sales, and one thing about jcpenney (which i shopped here in palm desert california) it is a self service, and too much clotter and items looks like going to good will, and the sales people are not sales people they are cashiers, none of the people there knows any thing about what is selling in the store, how can any retail store can survive in economy like today if you do not have a sales person that can help a confused costumer! the store is a maze and does not have any directions, so i feel since you spent so much money on re doing the store (i love what i saw here tonight looks good) but you need good experienced employees that knows I MEAN KNOWS WHAT THEY ARE SELLING!! that is the key of making a store survive, i worked in stores (that no one even remembers the names of the items i sold,they were so low in price) it took for ever to sell over a thousounds of dollars worth but i did it, todays clothing are more expensive, and to make a costumer want to spent money on the items they need help figuring it out, not with a teenager that does not know a bean about merchandise, but someone with experience that can sale not one item but many items to make one little sale a big sale! i get so frustrated when i go into a store and ask "do you know if this dress runs small or big?" hell no! they do not have any ideas, when i worked i could talk about the fabric the fit you name it! maybe hire less people and hire few good people to make more money for the store! jc penney reminds me of the first store i worked for, it only needs better orgonations and better sales people and friendly people, when you ask were i can find something they point i used to walk the costumer to the item and end up making a good sale! i love retail i love the old way of retail no commission just recognitions, it is so great to make costumer happy and make the store strive! too bad iam getting older i wish i could multiply my self to others because you need to love what you do to strive and make the company strive! i like the new concept (it is what i was used to and it works) but i do not like the fact that the only way to buy things you need the jcpenney card, you will loose a lots of money with that idea, you should give people the choice of using cash or card or jcpenney they will open a card any ways if you have an incentive like a 10% discount etc.

    any ways i hope this new change will work it looks great and i wish i was there to help out, i love challenges and i hope it works for you! please just hire people that has interest in you and not just looking for a job, it is nice to hire people that needs work but they "need to love to work for jcpenney"

    thanks for listen to me, it hurts to see retail store go out and hurt to see people shopping and no one helps them no matter if it is you, good will and saks fifth ave costumer service and knowledge is very important for a company to make it, i know it is cheap to hire young people with out experience i rather hire one good sales person than two no experienced people, pay the good sales person more and hire ONE GOOD ONE trust me you will do good in the company if you do!

    good luck to you i wish i could help because i love retail if who ever is in charge would let me run free to do my best!! hahaha i know! it is hard! but iam the best !!! modest i know, but iam!

    i hope my comment will help you with you little shops within the store, hire experienced people for those shops and you guys will do well! promise you!!

    sincerely

    angela

  • Report this Comment On September 23, 2012, at 2:59 AM, angela2u2 wrote:

    darlingrose? to answer you on the new concept about things been more expensive because of the "little shops?" iam sure it will not be more expensive it will be better looking and easy to find what you r looking for, the little shops are great, i know i used to work for a store that had it, i think it was macy's and also bloomingdales, it is fun, easy to find what you want and not necesseraly expensive, it looks good and makes the store look more updated!

    so dont fear that part, i do agree they should not have just jcpenneys cardholders shoppers they will loose money big time that way it is a bad idea i agree! i know by them using the jcpenney card the store will do better but not every one once that, so i hope the ceo will change that, if they do they should do pretty good!

  • Report this Comment On September 23, 2012, at 8:47 AM, glendalt wrote:

    I was actually somewhat excited that JC Penney is opening a new store close to me. Loved that there is a Sephora shop and hoping there will be a Levi's shop as well. However, since the CEO is not interested in "little old ladies" guess I won't shop there after all. I will continue to take my money to Nordstrom and Neiman-Marcus. I'm pretty sure 62 qualifies me as an "old lady" but guess my money is just not good enough. No problem. You won't get any of it.

  • Report this Comment On September 23, 2012, at 2:17 PM, dgraham1174 wrote:

    JC Penney is way past its prime they cater to hispanics because thats where they think the money is. Also not every mother lets their teenage daughters wear shorts so short it shows the cheeks of their butts or shirts so low that they show everything else their is still some ethics in this world. Also the company doesnt care about its customers that why Mr. Johnson said penneys customers couldnt understand the new pricing does he think they are stupid. The associates are way under paid and over worked while management pushes for more more more no I will not shop jc penney any more i to will take my money to better retailers.

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