J.C. Penney Takes a Breather

Perhaps venerable department-store operator J.C. Penney (NYSE: JCP  ) is just stopping to catch its breath. At current prices, its shares have more than quadrupled since its restructuring plan finally took hold in 2003. However, shares fell more than 3% after the company reported a more subdued outlook in its fourth-quarter earnings. Still, a number of positive trends could keep Penney's rolling through the aisles.

For starters, J.C. Penney has found several ways to revitalize loyalty in its core mid-tier consumer demographic. It's improving its merchandise mix, freshening up older stores, and opening new stores in off-mall locations, where consumers have followed cost-savvy rivals such as Kohl's (NYSE: KSS  ) , Wal-Mart (NYSE: WMT  ) , and Target (NYSE: TGT  ) .

J.C. Penney is increasingly embracing private-label merchandise to stoke profit margins, but it's also selecting popular branded products by partnering with make-up firms such as Sephora. The company just announced that Ralph Lauren (NYSE: RL  ) is developing a "new lifestyle brand," exclusive to Penney's, called American Living. These strategies have worked wonders for same-store sale trends, and the upswing continued in 2006 with a 3.7% improvement in comps.

But retailing is never easy; comps may have fallen into negative territory in February, spurring management to temper first-quarter expectations. However, J.C. Penney's price-to-earnings ratio is reasonable at less than 16, considering its four straight years of strong performance. In addition, Penney's has managed to survive for more than a century as a stand-alone entity. Few retailers can claim such a feat, and after many years, the company may have found a fashionable way to grow -- despite the continued success of the strip-mall competitors identified above.

For related Foolishness:

• Wal-Mart Defies Logic
• The Best Retail Stock for 2007: Target
• J.C. Penney Cashes In

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy