J.C. Penney (NYSE:JCP) has been one of the more maligned stocks this year as the share price tumbled amid sharply declining sales. But there are reasons to think that the century-old retailer can pull itself out of this mess. What follows is an excerpt of the Fool's premium research report examining J.C. Penney's opportunity.

The opportunity
Oh, the times they are a-changing. J.C. Penney, the once-venerable retailer that became a mall anchor across the country, opening over 1,100 department stores, has become a stodgy brand, struggling to remain profitable. Fast-fashion imports like H&M, Zara, and Forever 21 have become favorites of the new generation, dominating the industry and leaving Penney's in the dust. As the charts below show, both revenue and net income have declined significantly over the past five years:

JCP Revenue TTM data by YCharts.

JCP Net Income TTM data by YCharts.

To reverse this trend and transform the company, J.C. Penney hired retail wizard Ron Johnson, who came on as CEO in November 2011. Johnson was the man who led Apple's retail strategy, achieving record-shattering sales-per-square-foot figures, and before that served as an executive at Target, where he helped rebrand its stores with a sense of chic that elevated it above its peers.

Johnson, of course, won't have the help of Apple's groundbreaking product line this time around, but his plans are bold nonetheless.

In January of this year, the company announced a multi-pronged strategy that included:

  • Fair and Square Pricing: A three-tiered pricing structure made up of everyday, month-long, and best (lowest) prices.
  • A new marketing strategy centered around 12 promotional events themed according to each calendar month.
  • Adding more global brands and organizing stores based on a store-within-a-store-concept laid out as a town square. This includes three major categories: The Shops, The Street, and The Square.

After two quarters of this strategy in action, the results weren't pretty. In the first quarter, same-store sales plummeted 18.7%, and Internet sales fell even more sharply, by 27.9%. Investors hoping for redemption in the second quarter got none. The bloodbath continued as same-store sales dropped 21.7% and its EPS loss dropped to $0.37 a share.

Investors need to remember that this is a multiyear strategy, and positive results will take time. Johnson has stated that the new format has outperformed other parts of the store as it's been rolled out.

J.C. Penney also needs to shed the coupon-conscious customer of yesteryear in order to revamp its brand and appeal to a more youthful demographic. In many ways, the company will have to take two steps backward before moving three steps forward. Johnson describes the process as "retraining the customer."

His efforts thus far have been scorned by many industry observers, who argue that J.C. Penney is a much different animal from Apple or Target, and mock initiatives such as the free kids' haircuts J.C. Penney has offered on Sundays. But Johnson has also won some recognition from peers. Macy's has begun using the same store-in-store strategy, recently adding Finish Line outlets to its department stores. Sears' former chief marketing officer, David Selby, gave Johnson his vote of confidence, saying he believes the transformation will ultimately be successful, and fashionista Nina Garcia caused a brief spike in the stock when she tweeted after seeing a new store prototype that it was going to be a "game changer."

For investors, this is ultimately a value play. J.C. Penney's volatile stock has been beaten down into the $20 range after trading above $40 earlier this year when the market had high hopes that Johnson would come to the rescue. With a price-to-sales ratio under 0.40, the stock is cheap, and a return to profitability should surely send shares climbing again. If it could achieve a Macy's-like profit margin of 5%, its P/E would be just around 7 at the current stock price.

If you found this information useful, I encourage you to pick up a copy of our full premium research report on J.C. Penney, which includes analysis of its risks, leadership, key areas to watch, and reasons to buy and sell the stock. To get access to this valuable insight now, all you have to do is click right here.

Jeremy Bowman owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.