J.C. Penney Is Following in Macy's Footsteps but Failing

J.C. Penney is cutting costs just like Macy's did, but the troubled brand can't cut enough to make the top line grow.

Jan 16, 2014 at 4:40PM

I think we can all agree that there are worse ways to be successful than by copying the success of others. It happens all the time, after all. Heck, without the system, what would inspirational speakers do? Given all that, it shouldn't be too surprising that J.C Penney (NYSE:JCP) has followed in the footsteps of Macy's (NYSE:M), cutting jobs and closing locations to help out the bottom line.

Unfortunately, the initial reaction hasn't been great. While Macy's popped after its announcement, J.C. Penney was down 5% in morning trading.

The more you cut, the more you save
J.C. Penney's plan involves closing down 33 locations and firing -- though we never say "firing" -- 2,000 people. Now, to be fair, the company is actually "eliminating" 2,000 positions, some of which may currently be unfilled, so it's possible that 2,000 people aren't being fired -- but a bunch are. The annual savings estimate for J.C Penney is $65 million, starting in 2014. For reference, in its last nine months, the company's selling, general, and administrative expenses have run up to more than $3 billion.

In the "tossing a bone" category, management also announced that it's going to bring back commission compensation for many of its sales staff. Commission had been killed last year while Ron "No Sales" Johnson was at the helm. Some analysts have called the return of commission a bullish signal, but it feels more like a mere reset to the Old Ways, a path current CEO Mike Ullman has pushed for.

For Macy's, the fat-trimming was on top of a successful year. The company laid off -- and used the term "laid off," which I think is nice -- 2,500 employees and closed just five locations. On top of the broad scything of employees, Macy's is also reorganizing some of its business to combine efficiencies. The moves are expected to save $100 million per year.

Final thoughts
There are a few reasons to swing for the fences in baseball, but two are (1) you're way up in the count, so if you miss, no problem, or (2) your team desperately needs a run. Macy's is sitting in the first position. The company had a solid 2013, with income per share rising 20% in the first nine fiscal months. Compare that to the back foot that J.C. Penney is on, having more than tripled its loss per share in the first nine months of 2013 compared to the same period in 2012.

The difference between the companies' 2013s helps to explain the difference in the market's reaction. What J.C. Penney is doing is seen as desperation, while Macy's move is seen as "strategic."

For reasons beyond logic, I'm actually starting to feel bad for J.C. Penney. Johnson's time at the helm put the brand so far behind that it's now hard to think of a way out of the hole. Fixing up stores, cutting costs, and driving sales through promotions or TV spots is just no longer going to cut it. J.C. Penney is getting punished because it's so far behind that Macy's seems like the winner by default.

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Fool contributor Andrew Marder has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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