J.C. Penney Travels to the Land of Oz

In The Wizard of Oz, Judy Garland opens the door of her little farmhouse onto the shining Technicolor glory of Oz and is awestruck. Ignoring the murder bit of it -- poor witch never saw it coming -- that's how I felt when I walked into my local J.C. Penney (NYSE: JCP  ) last week. Floors were clean, displays were full, lights were all on, useful signage was everywhere, and not a flying monkey in sight.

I've often thought of J.C. Penney as the way that you get into the mall. Empty parking lot and big doors, with the only drawback being that you have to walk past that sad-looking perfume station based on the classic, no-longer-relevant downtown department store model. This time, I bought something.

What happened at J.C. Penney?
Now, this like-fest doesn't mean that I think J.C. Penney should be worth $75. Instead, it gave me better perspective on the management of the company. It's a bridge too far to say that J.C. Penney is on its way to a huge bounce, but I do believe that it has a future.

It's not a popular position, I grant you. J.C. Penney's stock has been crushed over the last, well, ever. This year J.C. Penney is down 20%, over the past 12 months it's down 52%, and over the last five years, it's down almost 70%. In short: It's down.

Much of the decline has been, rightly or wrongly, pinned on former CEO Ron Johnson. Johnson's inability to turn J.C. Penney into the next Apple meant that the company simply suffered under his rule. When he departed, former CEO Mike Ullman took the reins back like Rocky in Rocky Balboa

Ullman has helped J.C. Penney bottom out, which seems like a bad thing but is actually indicative of the fall finally ending. In its last earnings report, J.C. Penney actually reported an increase in same-store sales. With the company having closed just 10 locations over the last year, the 2% increase in same-store sales looks like a reflection of actual good news.

J.C. Penney also had fourth-quarter success with its margins. Gross margin, operating margin, and net income margin all improved in the last quarter. Management is expecting these improvements to continue into 2014, with most of the hardest margin hits behind the company. 

J.C. Penney's viability as an investment
Refreshed stores, growing sales, expanding margins -- all signs pointing to yes. It's the first time in years that J.C. Penney has seemed like a potential buy. I remember that when Johnson first stepped in as CEO, one of my friends was very excited about a turnaround because of Johnson's history at Apple. I was less enticed. I believed then and believe still that J.C. Penney is a mediocre brand -- the difference now is that the risk of death seems diminished, while the stock is still priced for annihilation.

I don't think J.C. Penney is going to be the next J. Crew. I don't think it's going to suddenly become the hottest brand in the mall. I don't think that same-store sales are going to hit double digits. I do think that it will grow and that the worst is behind it. With a price to sales ratio of 0.19 -- Macy's is trading at 0.77 -- J.C. Penney is cheaper than it probably should be. For once, I feel comfortable recommending investors look into it. It may not be the yellow brick road, but it seems unlikely that you'll have a house land on you.

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