The term "staying the course" always reminds me of baseball managers. You win 17 of the first 25, and then promptly lose eight in a row. But the team still has some upsides. Maybe there are a few injuries here and there, but nothing to worry about. They're going to stay the course. Recently, JC Penney's (NYSE: JCP) CEO said he was "confident the transformation of JC Penney is on track" -- he's going to be staying the course, it seems. That's too bad, because the course increasingly looks like WWI-inspired no man's land. To top the minefield off, Macy's (NYSE: M) just announced that it's suing Penney. It's going to be a great year.
That course I've heard so much about
In its last quarter, JC Penney's track looked like a half-built roller coaster -- so far, it just falls. Same-store sales fell 22%, and revenue dropped 23%. Online sales managed to outperform the other areas of the business -- they fell even further, down 33%. But, in classic earnings call style, none of these things really came up during the Q&A. No analysts stepped up to say, "Uh, yes, hello. I can't help but notice that the ship is actively on fire -- do you have a real plan?"
The answer would have been "sort of." The plan is to turn JC Penney into a set of shops within a larger store – historically, these things are called malls, but whatever. Right now, the lead story from the company is how well the Levi's shop is doing. Same-store sales of Levi's are up 25% in the stores that have these new little shops. The plan is to roll out all sorts of shops, including a Martha Stewart (NYSE: MSO) shop. JC Penney kicked that alliance off last year when it purchased a 17% stake in the company for a cool $39 million.
Not so fast, Ron
The thing about the partnership is that it might, technically, in some minor way, breach a contract that Macy's has with Martha Stewart, opening both companies up to litigation. Not a great start. Last month, a judge granted Macy's an injunction that stops JC Penney from distributing Martha Stewart products. The case hasn't been resolved, though. Just this week, Macy's has filed a motion directly against JC Penney, accusing the company of trying to "eliminate the competitive advantage that Macy’s enjoys in the area of home products."
Apparently, Macy's still sees Martha Stewart as a good investment, as evidenced by its willingness to fight for exclusivity. The Martha Stewart brand has lost a lot of value this year, with the stock falling 29% in 2012, due mainly to failures in the company's media projects. But, for Martha, merchandising has been a light in the darkness. Last quarter, total revenue fell 16%, but merchandise revenue increased 12%. Any ruling that holds JC Penney back from working with Martha Stewart could have serious impacts on growth for both companies.
While this might be a little setback in Johnson's long term business plan, it doesn't seem to have hurt the stock. Since the second quarter release, JC Penney has watched its shares rise almost 10%, to over $24. I'm sure this kind of stock has a name a la "value trap," but that's not quite right. Penney is priced for growth, with a forward P/E of 16, but is showing all the signs of a slow death. It's not cheap, and doesn't seem to be doing the right things.
Greener pastures for investors
Instead of jumping on this weird little coaster, I'm going to stick with Macy's and Nordstrom (NYSE: JWN). Macy's has executed a solid growth strategy and, in its last quarter, same-store sales rose 3%. Nordstrom is working the same angle, and its same-store sales grew 4.5% last quarter. Nordstrom has also started to expand its Nordstrom Rack brand of stores, and has plans to open a total of 15 new locations this year, and 24 next year.
Same-store sales growth at Rack stores was a strong 8%, and the company is moving to capitalize on that growth. That's how you stay the course -- you do something good, you work through little setbacks, and you keep the long-term vision in mind. Compare that to the operation that JC Penney is undertaking, and it's clear why investors should look elsewhere.
The bottom line
Given the collision course that JC Penney seems to be on, I can't think of any compelling reason to invest in the company. I know Johnson comes from good pedigree, and that he has some sort of vision, but I doubt his ability to make JC Penney into the kind of store that he wants. I'd rather stick with Nordstrom, which has proven its ability to make good things happen. It's making a great move with Nordstrom Rack, and I think the expansion is going to start paying off almost immediately.
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