The Only Thing That Can Save J.C. Penney

For all the ways in which Ron Johnson's tenure at J.C. Penney  (NYSE: JCP  ) helped to bring the company to its knees, it's hard to say that he never implemented a good idea. Yes, it is true that in the two years he headed the company, J.C. Penney's revenue declined precipitously and its net income fell to a net loss. It is also true that this came about as a result of the company's decision to get rid of its traditional sales and to instead implement everyday low pricing with the hopes of attracting customers.

This attempt ultimately led to the retailer disenfranchising a large swath of its customer base. Despite all these shortcomings, perhaps one of the ideas implemented by Johnson might stand a chance of turning the company around: its store-within-a-store focus.

In an effort to revolutionize the company, Johnson came up with the idea to make J.C. Penney more than a store; he wanted it to become an ecosystem of commercial activity. His plan to do this involved giving popular, name-brand businesses the opportunity to open shops inside existing J.C. Penney stores.

By doing this, he believed that customers would be enticed into shopping there more because they could find the best of the best all under one roof, in a way that made advertising simple and easy. Merely walking through the store would open your eyes to numerous brands you could explore.

Two Industry Giants Face Off
The first significant step the company took in this direction was to strike up a deal in which it would allow Martha Stewart Living Omnimedia (NYSE: MSO  ) , a provider of household products and publications geared toward housekeeping, the ability to run a store-within-a-store setup within J.C. Penney locations.

Initially, the company expected this step to result in increased sales and consumer appeal. However, it was caught in a web of controversy shortly after its announcement when rival Macy's filed a lawsuit. According to the suit, Macy's alleged that Martha Stewart was effectively breaching its contract with the retailer, which specifically stated that no Martha Stewart products could be sold to competitors while the contract with Macy's was in effect.

In the hopes of defending its business, J.C. Penney fought tooth and nail with the expectation that it could continue to sell Martha Stewart products that did not bear her company's name, a request that Judge Oing approved of until a definitive court ruling could be made. Now, in terms of a ruling being set, Judge Oing claimed that both Martha Stewart and J.C. Penney must resolve their "troubled relationship" by Oct. 25, or he will make a decision pertaining to their relationship.

Hope Remains for Johnson's Dream
Despite these setbacks in the company's vision of developing a store-within-a-store business model, I believe that the basic idea is, for J.C. Penney, quite appealing from both the perspective of the customer and the company. It would be a good profit driver that could pull the company back from the brink while also increasing the customer's shopping options.

However, after the ouster of Johnson and his replacement by the company's prior CEO, Mark Ullman, plans were put on hold for the continued development of the business model in light of deteriorating fundamentals and the Martha Stewart lawsuit. That was until news broke that J.C. Penney struck up a deal with The Walt Disney Company (NYSE: DIS  ) to open Disney shops in some of its locations.

According to the terms of the deal, J.C. Penney will open 565 Disney "stores" inside of J.C. Penney stores. In addition to providing another avenue through which Disney can gain a larger industry footprint, the deal will give J.C. Penney the opportunity to draw in additional customers, especially as the holiday season approaches.

Irrespective of whether this particular deal will prove beneficial to J.C. Penney's goal of coming back from the brink, the deal does demonstrate that larger companies like Disney are willing to work with it. This is a sign that others may be able and willing to do so as well. As such, if J.C. Penney can utilize a rinse and repeat approach to getting big name companies to sign on to deals that will likely be accretive to earnings, then it is possible that the company may avoid bankruptcy.

Foolish takeaway
In spite of a failed turnaround attempt under former CEO Ron Johnson, it appears as though J.C. Penney is trying its best to turn business around. Unfortunately for it, it's highly likely that any deal involving Martha Stewart in the future is probably out of the question.

However, that may not be such a bad thing as the company has already received support from Disney, one of the largest companies a retailer could dream of working with. The question that remains now is whether or not management is able to find other big fish to bite on its business model in time to increase its liquidity and avoid an untimely demise.

Do you think J.C. Penney can rule retail?
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  • Report this Comment On October 25, 2013, at 12:46 AM, techy46 wrote:

    Bad idea trying to turn JC Penny into Sears.

    JC Penny was doing pretty well selling medium quality merchandise at good prices often on sale to the middle class of shoppers. They did need to do anything but stay the course and tell WS to go screw themselves, Now it may be too late?

  • Report this Comment On October 25, 2013, at 1:24 AM, ABigelow wrote:

    "Tell WS to screw themselves," you do understand that you are on an investing website correct? How are businesses such as Martha Stewart and Disney not middle class?

  • Report this Comment On October 25, 2013, at 10:36 AM, Matt8265 wrote:

    I would love to see JCP merge with Sears picking the finest of each and retaining the JCP name. IF Sears does nothing all that traffic will end up at JCP anyway.

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