Just say no.
After a 35-year run in the business, venerable retailer J.C. Penney
It's not difficult to see that a clothing store operating a huge chain of drugstores is a classic example of Peter Lynch's concept of "di-worse-ification" -- that is, diversification so far removed from one's core competency as to weaken the corporation practicing it.
Although most don't realize it, J.C. Penney has had a long history of owning drugstores, beginning in 1969 when it acquired Thrift Drugs. The synergies of no-go growth in department stores with go-go consolidation in discount drugstores in the mid-1990s had Penney on a buying binge, acquiring 200 Rite Aid
Yet too much of a good thing is too much of a good thing. Even as the competition reported rising sales and earnings, Penney was hard-pressed to keep up. And not just with other drugstore chains but also with discounters such as Wal-Mart
CEO Alan Questrom is in Year Four of a five-year rehab plan. The turnaround specialist said the company will use the proceeds from the sale of Eckerd to pay down $2.3 billion of its $5.1 billion long-term debt while at the same time buying back $3 billion worth of company stock, a move that could reduce its diluted share count by 23%. Those measures, coupled with the elimination of $3.4 billion in lease obligations related to Eckerd, would create an $8 billion improvement in its balance sheet.
It's a move the credit rating agencies have looked upon favorably. Last month, both Moody's
It's been a long, strange trip for the 100-year-old retailer. Sales and profits have improved significantly over the past year as it emerges from its drugstore-induced haze. Yet di-worse-ification, like drug addiction, is something that's easy to fall back into. While investors can and should enjoy Penney's current clear-eyed plans, they ought to keep a watchful eye out for any relapse.
Fool contributor Rich Duprey has been known to enjoy a Coors Light-induced haze. He does not own any of the stocks mentioned in this article.
More from The Motley Fool
6 Ways to Make Your Retirement Savings Last
Breaking a big retirement rule is one of them.
Can You Really Make Money Mining Bitcoins?
Profits are not easy to come by. Expensive hardware and risky cloud mining deals are the main challenges.
3 Things to Watch in the Stock Market This Week
Look for Netflix, P&G, and Starbucks to make big moves over the next few trading days.