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Is J.C. Penney Just Out Of Ideas?

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This week, endlessly troubled retailer J.C. Penney (NYSE: JCP  ) announced that it would be cutting 2,000 jobs and closing dozens of stores. The reason makes enough sense -- shutting down underperforming stores so that resources are more effectively allocated to the winning parts of the company (to be determined). Realistically, though, this doesn't sound like the hopelessly optimistic department store that took major risks in changing course; rather, it seems like the usual MBA-mandated cost-cutting maneuvers. In these darkest days of J.C. Penney, is management out of ideas?

You can't really blame Penney for this latest announcement. The company needs to keep the coffers filled enough to keep the lights on, and that means trimming the fat. The problem is, there is no bone in this beast -- it's all fat.

This is a common tactic to stop the bleeding, but a temporary one at best. Though it failed spectacularly, Penney could be commended for taking chances. It tried to reinvent itself as a retailer, and chose retail's best guy to do it. Sadly, the effort resulted in alienating the existing customer base and attracting roughly zero new ones -- but it was a real, non-Harvard Business School effort on management's behalf.

Today, Penney sounds like many other struggling retailers. The numbers are heard louder than anything else, and shutting down the worst of the worst will save millions -- not to mention the reduced employee expense.

It's simply not a solution to a problem that, as of yet, the company has not even begun to solve.

Silver lining
What good could come out of this besides a less dreadful quarterly earnings report? If management treats the freed-up funds not as money saved but as more money available for deployment, then the effort makes sense.

Penney doesn't need to boost its cash or focus on paying down debt -- those are strategies for companies with stable business models. With whatever the company saves from its closures, management should further invest in fixing the actual problem: People see no reason to shop at Penney.

And then, there is the more financially sound strategy: Prepare to take the company off life support and let the liquidation value analysts drive the stock price higher in hopes of dissolution.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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Related Tickers

8/28/2015 4:02 PM
JCP $8.94 Up +0.47 +5.55%
J.C. Penney Compan… CAPS Rating: *