10 Reasons Why J.C. Penney Will Survive and Thrive

An investor's reasons for believing in the J.C. Penney turnaround.

Jan 22, 2014 at 4:14PM

While I am completely aware of J.C. Penney's (NYSE:JCP) financial situation and the tremendous uphill battle the company is in the middle of, I do think the company will survive. In order to stabilize the business and the balance sheet the company needs to increase sales and improve margins, which I think they will do. Here are 10 reasons for my conviction:

1.) The company is again focusing on quality private label brands that produce higher margins for the company. Look no further than the Xersion fitness line, as well as the new City Streets fitness gear targeted at women. The company is promoting and producing products that are in demand, have high quality, and are much more affordable than competitors. More importantly for investors, these products produce higher margins. They've already brought back St. John's Bay apparel, JCP Home and Cooks, and Ambrielle lingerie and sleepwear has just started to hit shelves and the website. They will keep the popular National brands in stores, while eliminating the National brands that didn't sell well and created low margins. They are also working on successful exclusives like the Sephora stores within J.C. Penney that have been profitable for the retailer. As the product mix continues to advance, gross margin percentage will return to historical levels that ranged in the mid to upper thirties.

2.) They don't need to completely reinvent their business; they just need to continue to return to where they were prior to Ron Johnson's era. This includes reinstating the brands core customers are used to, having the promotions customers enjoy, and most importantly getting these core customers back in the door. When I read their Facebook page comments I see a lot of J.C. Penney core customers pleased that the stores have returned to the old ways with promotions and a more appropriate product mix. Another faction of customers are still complaining that they took coupons away. This represents a large chunk of customers who remain uninformed and could return to the store in 2014 and going forward.

3.) The majority of stores have been updated. In the stores I have visited the flooring, displays, fixtures, lighting, and overall feel of the store is sharp. During the transition days of Ron Johnson, half of these stores seemed to be permanently under construction. The company has "gotten out of its own way" so to speak with the majority of stores being finished. This allows for a better shopping experience, better displays, and more inventory on the sales floor. Instead of having to reinvent itself, the company can make modest modifications going forward to improve the shopping experience and merchandise layout, not a complete rebuild and restyle of its stores. There will be some transitions from Joe Fresh and other brands they are discontinuing, but at most these projects will take a couple weeks or less.

4.) Coupons are back. People can argue all they want about the practice of coupons, but you cannot deny that they are popular with J.C. Penney's core customer. For those that refuse to believe this, take a look at a Macy's (NYSE:M) ad or their website. Coupons are the way of department stores. When a customer walks into a store with a $10 off $25 coupon or something similar, their chances of purchasing a $25 "SRP" (suggested retail price) item for $15 are much higher than if they stumble across the same item at $15. The company knows how to use these coupons to still make appropriate margins, as they are generally targeted at many of the higher margin J.C. Penney brands.

5.) A promotional environment during 2013 Q4 helped J.C. Penney. While companies took hits on margins and had to spend more to get sales from their existing customer base, J.C. Penney benefited from this time by introducing new customers and reintroducing old customers to their store and product selection. Many of the customers that had been turned off by the company's previous strategies came back into the store for deals, armed with coupons in hand. Think about lifetime customer value and all the customers J.C. Penney shunned with the Ron Johnson era. Getting these customers back in the door increases the chances that they will return and J.C. Penney will have them "back in the fold." Many of these shoppers used their J.C. Penney charge card and will receive offers via direct mail to keep them coming back, in addition to all other marketing initiatives.

6.) The VP of Marketing understands the core customer. J.C. Penney hired Debra Berman as the Senior Vice President of Marketing in July 2013. Berman previously oversaw media and marketing strategy for brands that spend in excess of $500 million globally on advertising at Kraft Foods Having a marketing leader that understands the American household is a huge advantage for J.C. Penney returning to its previous place in the American retail landscape.

7.) Web sales continue to rise. J.C. Penney has a well-performing e-commerce website, multiple distribution facilities, a strong email campaign strategy, and robust online marketing initiatives. The company also offers free ship to store for orders over $25, and will place online orders for customers in the store. As much as Macy's omnichannel strategy is praised, they currently do not have a robust ship to store policy. The company is also hiring important additional e-commerce positions that will help to keep e-commerce sales growth on a positive trajectory. Also, during the Ron Johnson era merchandise wasn't aligned in-store and online, and J.C. Penney has gotten out of its own way here by realigning these. When a customer is in a store and needs an additional item or different size, a JCP associate can now assist in getting that order placed online.

8.) Mike Ullman knows the business better than anyone, and Stephen Sadove is a great addition to the board. I think that Mike Ullman was the right choice for J.C. Penney to attempt the current turnaround. He was able to hit the ground running with his connections and vast experience in the industry, as well as his comfort with the overall company landscape. The addition of Sadove gives them more credibility and guidance in the general retail area, and strengthens the company going forward. Perhaps Sadove would be Ullman's successor once the turnaround is complete. Even if not, he will help to find the right leader to take over after Ullman's departure. In a best case scenario, Ullman's second act as the CEO of J.C. Penney will be compared to the turnaround efforts of Alan Mulally at Ford. As far as how Wall Street has viewed Ullman, I don't think the recent December sales press release was intelligent, but at the same time the stock also got hammered when Ullman released the 10% SSS increase in November. I don't think the company had a terrible December, but I do think they have grown self-conscious of how their news releases have been taken by the street. The secondary offering in September has not helped his cause. If suppliers changed their terms on the company and Ullman was forced to get that done, in the future it may be viewed as an important piece of strengthening the turnaround.

9.) The company has a niche. I don't know how many more articles or comments can be written that say "who even shops there anymore?" or "why would anyone shop at JCP?" J.C. Penney has a place within the middle class of America. The brand name is actually a staple for a lot of consumers. In brutal back to back transition years the company will still be doing approximately $12-13 billion per year. Although this was unprofitable, as sales and margins rise, the company has a path back to profitability. I also believe the company has competed well with Macy's  this holiday season, and taken share from Sears . Many core customers find a lot of Macy's brands to be too high end for them, and with a return of J.C. Penney staples and promotions, it's possible that many of these customers came back on some level to shop at J.C. Penney.

10.)  Ron Johnson era clearance inventory will be gone in 2014. This inventory has weighed down margins and taken up store space that the company can use for more higher margin private label brands. On top of the higher margins, these are brands that the core customer of J.C. Penney also enjoys purchasing. Management expects this hangover inventory to continue to weigh on margins in the short term, but once it's gone margins should return to historical levels of high 30's. The company is actively pushing clearance promotions to get rid of this inventory.

The bottom line
There's no guarantee that J.C. Penney will return to the position it held in retailing prior to Ron Johnson's era, but given the facts at hand I do believe a turnaround is very possible and that the company will survive. Much of the story around the stock price doesn't reflect what is being done at stores, and I look forward to seeing Q4 results in February, as well as hearing what is said on the conference call. If the turnaround continues to take hold and sales and margin levels improve, the stock price has a lot of upside. As always, Foolish investors should do their own research prior to investing.

Fool contributor Shawn Crandall has a long position in J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. 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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