Bon-Ton Looks to Swipe Holiday Share

The Bon-Ton Stores (NASDAQ: BONT  ) has been working hard to keep its share of holiday goodies (i.e. shoppers) away from bigger department store chain J.C. Penney (NYSE: JCP  ) . The two are like sitcom siblings fighting over a Christmas toy, but in this case it's market share. By a big pile of presents, looking on amused, is big brother Macy's (NYSE: M  ) , the largest department store chain in the US.

But little brother Bon-Ton has a big plan. That plan is to be just like big brother Macy's. Is it good enough to swipe share from under Macy's and J.C. Penney's noses?

Imitation, the sincerest form of profitability?
In 2011, Bon-Ton hired Brendan L. Hoffman as the new CEO. As chief executive, he was credited with reviving a moribund Lord & Taylor. Before that, he was CEO of Neiman-Marcus Direct, the company's e-commerce division. He now presides over Bon-Ton chain's 271 stores under brands Bon-Ton, Elder-Beerman, Younkers, Parisian, Carson Pirie Scott, Bergner's, Herberger's, and Boston Store.

Hoffman has taken some pages from Macy's winning playbook. First, Bon-Ton is localizing merchandise a la My Macy's. Bon-Ton is putting boots on the ground in the form of merchants in the field offices to better oversee regional needs. It already seems to be working as Hoffman noted inventory was leaner by 5% versus last year. Not a moment too soon, as Nomura Equity Research is warning of rising retail inventory levels.

Second, Macy's CEO Terry Lundgren travels 40 weeks annually making unannounced visits to stores.  Hoffman visited 30 to 40 stores in the Bon-Ton chain the month before earnings to talk to managers.

Third, Bon-Ton is expanding its upscale demographic with more Coach, Michael Kors, and Ralph Lauren merchandise, all mainstays at Macy's. Bon-Ton's World of Ralph Lauren launched in mid-November. Hoffman said, "The Ralph Lauren brand and the earlier launches that Michael Kors and Coach[,] among others, have given us an arsenal of status resources that allows us to now compete on equal footing with our peer group."

Fourth and most importantly, Hoffman is doing what he was hired to do, ramp up e-commerce.  Hoffman's initiatives led to an improved third-quarter report and an upgrade by Zack's to a strong buy. Chief executive Hoffman said on the third- quarter call, "The world retail congress ranked our website No. 2 in US department stores in their quarterly survey, with the focus being on user experience."

Hoffman was upbeat and bullish on the call, more so than J.C. Penney and Macy's have been, almost giddy as he guided for a bright holiday season: 

As we look forward to [the] fourth quarter in the holiday season, we have [a] renewed sense of optimism that was absent until recently. While we recognize that we are operating in a choppy environment[,] we think we are well prepared for the springboard that we believe this holiday season will be.

That said, gross margin dollars decreased by $8.5 million to $667.9 million, although gross margin as a percentage of sales increased 48 basis points to 36.1% year over year. The company still has a net loss of $0.05 per diluted share, but that's a dramatic improvement over last year's loss of $0.55 per diluted share. Little brother is getting smarter and stronger.

What's J.C. Penney's plan?
J.C. Penney is still recovering from ex-CEO Ron Johnson's disastrous deep-sixing of coupons, promotions, and beloved brands even as Bon-Ton's Hoffman ramped them up. Since Johnson was ousted, current J.C. Penney CEO Myron Ullman has reinstated coupons and promotions and brought back private-label brands St. John's Bay, Stafford, and Arizona. According to Ullman, private-label sales are finally returning to historic levels.

This holiday quarter is a make-or-break one. It's promising with rising same-store sales in October, the first same-store sales rise since December 2011. J.C. Penney is ruthlessly ridding itself of inventory from Johnson's legacy with deep discounting.

On its third-quarter call, CEO Ullman offered the glimmer of a holiday miracle forthcoming when he told analysts, "The turnaround at J.C. Penney is beginning to take hold."

Like Macy's, J.C. Penney understands the importance of the beauty counter and has strengthened its relationship with Sephora, now with 446 Sephora stores within J.C. Penney locations. The company also realizes e-commerce is critical to compete against Macy's. E-commerce sales at jcp.com rose 24.5% in the third quarter.

Despite clear signs of turnaround progress, the company still reported a net loss of $1.94 a share compared to a loss of $0.56 year over year. Gross margin as a percent of sales is lower than Bon-Ton at 29.5%.

Both J.C. Penney and Bon-Ton have seen huge stock declines from their all-time highs -- Bon-Ton's highest high was slightly more than $56 in May 2007, when J.C. Penney hit its pinnacle of $82. Both have high short interests, 34.4% and rising for Bon-Ton, leading to volatility with Bon-Ton rising 40% after better-than- expected results on Nov. 21. Bon-Ton has a high beta of 3.5. But the short interest of 51.7% (and growing) in J.C. Penney is shocking.

Meanwhile, Macy's reported a good third quarter and as is its custom was cautiously optimistic guiding for the holidays. Macy's still has the highest gross margin of these at 39.9% and has had positive earnings for quite some time, trading at a 14.6 trailing-earnings multiple with a 1.9% yield.

JCP EPS Diluted (TTM) Chart

J.C. Penney EPS diluted (trailing-12 months) data by YCharts

Keep an eye on little brother
Bon-Ton is the one that seems to have the most upside, although it is speculative and volatile as it tries on what works for Macy's. J.C. Penney may be in a turnaround, but it doesn't yet have enough pull to grab back share it lost to Macy's and Bon-Ton. Macy's can smile indulgently for now but  better keep an eye on Bon-Ton long term.

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