For J.C. Penney, Poor Results Are Better than Abysmal Results

J.C. Penney has been showing small signs of a turnaround, but going by former CEO Ron Johnson’s tenure any comparisons will look positive. Be sure to look a little deeper into this story.

Jan 30, 2014 at 5:30PM

J.C. Penney (NYSE:JCP) reported a loss of $985 million for fiscal 2013. This is old news (period ended February 2, 2013), but it's being mentioned here because it immediately lets you know that the $65 million per year J.C. Penney plans to save -- thanks to the closure of underperforming stores and the reduction of headcount by 2,000 -- will only have minimal effects on the bottom line. These moves are steps in the right direction, but much bigger steps will need to be taken if J.C. Penney wants to reach its lofty goal of long-term profitable growth.

Not only does J.C. Penney have to win back the customers it lost during the Ron Johnson era, it will have to find a way to attract new customers in an economic environment where consumers are hesitant to spend. Millennials (the largest generation since the Baby Boomers) have a very limited connection to the brand. 

These headwinds are massive. Fortunately, there is good news for J.C. Penney. On the other hand, this good news isn't likely to lead to long-term profitable growth.

Historical performance comparisons
Everyone can agree that Ron Johnson's approach of offering everyday low prices and scratching discounts while also redesigning stores in an effort to attract younger consumers was a failure. However, most people don't realize that J.C. Penney had been failing prior to Johnson's arrival. When you look at the net income chart below, keep in mind that Ron Johnson was hired in November 2011:

JCP Net Income (TTM) Chart

JCP Net Income (TTM) data by YCharts

Net income fell off a cliff after Johnson arrived. The company was definitely better run when Myron "Mike" Ullman was in charge. That said, notice the steady decline in net income for J.C. Penney while Ullman was at the helm. J.C. Penney wasn't falling off a cliff, but it was suffering a slow and painful death.

The good news is that considering J.C. Penney's atrocious performance with Johnson in charge, any year-over-year comparisons should look good for J.C. Penney. This might lead to investors getting excited about a potential turnaround. However, there aren't many catalysts which could lead to a sustainable recovery. Ullman has brought back discounts and St. John's Bay, and 3,000 employees will soon switch back to commissions, which limits risk for J.C. Penney and improves the odds of top-line growth due to increased motivation from the salesforce. These initiatives still don't seem enough to dig J.C. Penney out of a deep hole.

Retail environment
According to the National Retail Federation, retail sales for the holiday shopping season increased 3.8% to $601.8 billion year-over-year. Growth is always good, but this result missed expectations, and the increase in sales wasn't widespread.

Macy's was one of the retailers that succeeded in the holiday season, with sales jumping 4.3% and comps climbing 3.6%. There are several reasons for this success, one being Macy's approach of targeting the omnichannel consumer. This pertains to targeting consumers via marketing that revolves around having the same products and ads going through different channels (in-store, online, mobile). The basic premise is to cater to consumers regardless of how, when, or where they want to shop.  

Macy's peers are following, but Macy's has established a large and comfortable lead in the omnichannel space. Macy's also offers broad product diversification, and its Bloomingdale's brand targets the high-income consumer. High-income consumers are doing well right now, partially thanks to the strong performance of their investments, which includes the stock market. 

On the other end of the spectrum is Best Buy (NYSE:BBY). Although Best Buy is an electronic retailer and not a department store, looking at the results of an electronics retailer is a good way to gauge discretionary spending. For the nine weeks ended January 4, Best Buy's domestic comps slid 0.9%. Sales also declined 2.6%. Best Buy cited fierce competition as one of the key reasons for its poor performance. Best Buy has also had to rely on steep discounts to attract customers, which negatively affected margins. 

Over the same time frame -- the nine weeks ended January 4 -- Sears Holdings (NASDAQ:SHLD) suffered a 7.4% comps decline. Comps at Sears stores plummeted 9.2%, and comps at Kmart stores suffered a 5.7% decline. Both brands saw weakness across most categories.

The bottom line
If the consumer is now this selective, a retailer must constantly innovate in an unique manner in order to stay ahead of its peers. It doesn't seem as though J.C. Penney is accomplishing this goal. Ullman might not want to take too many risks as year-over-year improvements are likely, which will look good over the short term. Johnson also took massive risks and failed.

Though it's possible for J.C. Penney to look impressive over the next year, there are no reasons to think that J.C. Penney can perform better than it did prior to the Johnson era, which won't be good enough. Please do your own diligence prior to making any investment decisions. 

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A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

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