J.C. Penney Looking For -- and Finding -- Some Answers

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Fun fact: In 2007, J.C. Penney (NYSE: JCP  ) had a market cap well above $15 billion. Today, the company is worth $2.6 billion on the open market, which is much better than the business was looking this time last week. A solid earnings release brought some investors back into the fold. Same-store sales rose for the quarter -- though they fell for the year -- which was a huge win for J.C. Penney.

One good quarter does not a turnaround make, though, and there's still a long way for J.C. Penney to go before this company is back up and running like the J.C. Penney of old. Luckily, there seems to be a real plan to make that happen. Welcome to the new J.C. Penney.

It's not all sunshine for J.C. Penney
When trying to see the bright side of the J.C. Penney business, it's important not to don those rose-tinted glasses. It is still in a pretty bad way. Comparable sales fell over 2013, gross margin dropped, and the business reported a $1.42 billion operating loss for the year.

Without belaboring the point too much, J.C. Penney is still working to dig itself out of the hole that former CEO Ron Johnson blasted in the business's foundation. Johnson's attempt to rid stores of sales and make them look more like his beloved Apple retail locations went over like a screen door on a spaceship. Now, prodigal CEO Mike Ullman is trying to get core customers back through the doors.

The bleeding has been slowing for the past year, with comparable-store sales falling less and less each quarter until they finally took a positive turn at the end of the year. Ullman's approach has been to use "merchandising and marketing strategies that would enable [the business] to reconnect with [its] core customer." After fighting off the Grim Reaper for a year, it looks like J.C. Penney finally gets some breathing room.

Turning the business around
Reconnecting with your core customer is clearly the right thing to do, but if it were easy, no one would ever go out of business. J.C. Penney is trying to pull back customers who have likely fled to Macy's or TJX Companies' T.J. Maxx brand. Those companies both increased comparable sales over the course of 2013, welcoming dissatisfied Penney customers with open arms.

To get those customers back, J.C. Penney has to focus on the qualities that it has been lacking that T.J. Maxx and Macy's -- and other competitors -- have. First and foremost, J.C. Penney has to get sales back into a healthy spot. Johnson was probably right to be scared by the sheer volume of items that only sold when on sale, and now Ullman needs to find a healthier balance.

How J.C. Penney is getting customers back
It starts in the store, with marketing to let people know that sales are back on. J.C. Penney is often the way people get into the mall, and the company can reach a huge chunk of potential shoppers just by putting up signs in windows and walkways. The second half of the equation is making promotions feel promotional. T.J Maxx has the benefit of those "Compare At" labels, telling customers how much the product would cost elsewhere. J.C. Penney has to price its own merchandise just right -- too high and nothing will sell at "normal" price, too low and the sale won't look meaningful.

By focusing on making promotions work, J.C. Penney has the chance to get customers back in its stores on a regular basis. The rise in same-store sales this past quarter is definitely a good sign, but there's plenty of road left to travel. I'm also buoyed by the completely anecdotal evidence that the J.C. Penney near me looks better today than it did six months ago. That's got to count for something -- for instance, the $15 I spent there because it was easy to find the sale item I wanted.

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  • Report this Comment On March 05, 2014, at 10:19 AM, Roddy6667 wrote:

    Same store sales are up for the quarter because of closings. A nearby store will benefit. It's only 2%. The company needs to increase its margin. They should get rid of Marie Lacertosa and Rich Wallace in Supply Chain. She was flying around in the corporate jet forcing facilities to install windmills on their roofs when the company was plunging into disaster. Neither she nor Wallace know much about modern supply chain management. They have been in place for decades. JCP brags that they promote from within, regardless of your qualifications.

  • Report this Comment On March 05, 2014, at 11:26 AM, iamfool wrote:

    Anything below $15 for JCP stock is not worth discussing since it is an immediate bankruptcy valuation. JCP has not bankrupted in over 100 years, and it will not in this decade for sure. But if you are a short you will. And very soon too. Don't be the brave guy here, get out of short now and let some other short bankrupt.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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