Does the 'J' in JCPenney Now Stand for 'Junk'?

JCPenney (NYSE: JCP) is struggling to reinvent itself under new CEO and wunderkind Ron Johnson, and the stress is beginning to show. Johnson, long recognized as the brains behind the Apple (Nasdaq: AAPL) mini-store concept and the sprucing up of Target (NYSE: TGT), has a whole new plan for Penney's. Unfortunately, it looks like the patient may not survive the reconstructive surgery Dr. Johnson has in mind.

Out with the old, in with the new
Penney's has long been known for overblown coupon sales, often offering merchandise for half to 75% off regular price by requiring customers to use a proprietary blend of store cards, coupons, and shopping stamina. Underneath it all, however, the company seemed to be stagnating.

Enter Johnson, with his creative streak and store-within-a-store methodology that had worked so well in the past. With JCPenney, Johnson will repeat his signature move: up to 100 stores within the store, all carrying designer brands. The store will resemble an "Anywhere, USA" downtown, including a Main street as well as radiating side streets composed of designer mini-stores. Customer service? It's called "Town Square," and will supply treats as well as services. Interesting concept, certainly -- but can it work?

One person's junk...
It looks as if many analysts have their doubts. Just last month, Penney's was downgraded by Fitch to BB+ from BBB-, a slip toward junk status precipitated by concern over management's ability to make the new marketing strategy work over the next several months. Then the company missed Q4 revenue forcasts by $70 million, and Johnson stated publicly that February was not going to be stellar in the sales department. Others began to doubt the viability of a new Penney's, fearing that an "everyday low price" model would alienate customers accustomed to the retailer's former slash-and-burn sales format. Now, Standard & Poor's has chimed in by knocking Penney's down to BB from Fitch's former BB+. It's official: JCPenney is junk.

Not everyone is crying. Macy's (NYSE: M) is feeling very smug, anticipating increased foot traffic as Penney's goes through its growing pains. And they're not the only ones: Analysts noticed earlier this month that other retailers had experienced some increase in sales, attributing this to the lack of same at Penney's, who no longer reports sales each and every month. Even Target, lovingly guided for 15 years by Ron Johnson himself, seems to be enjoying an upsurge at Penney's expense. Maybe the only retailer not joining in the fun is Sears (NYSE: SHLD) -- once the main rival of JCPenney, via both store and catalog -- which is currently experiencing a meltdown of the very core of its business, under the "guidance" of Edward Lampert.

Can JCPenney survive?
The consolidated opinion here seems to be that the next year or so will test the mettle of the large retailer, as well as that of Ron Johnson. There is no doubt of the man's talent, and the magic he performed at Apple is still an integral part of their business model today. His vision for Penney's seems a bit over the top, but I believe that he can pull it off. Meantime, we can all enjoy the new, Target-like ads, remembering that he once polished their star as well.

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