Whether you believe J.C. Penney (JCP +0.00%) can be saved or not, it is hard to deny that CEO Ron Johnson is the ideal person to be at the helm of the troubled retailer. While 2012 was a difficult year for the company and its investors, Johnson portrayed himself as a visionary who is not afraid to admit fault, who can make the necessary changes, and above all else, who can move things forward. The company has already endured a tremendous shift, and there is much left to go before it can be guaranteed that it does not go the way of the dinosaur, or payphone, or postal service on Saturdays. One thing, though, is for sure -- Ron Johnson is one of the greatest retail chiefs in the business.
History aside
While it would be enough to justify Johnson's talent by simply mentioning the words "Apple Store," I somehow feel compelled to defend the J.C. Penney showrunner from the legions of bears who can't fathom a future that holds a thriving, successful JCP. Sure, the company didn't do as well as Johnson (or myself, for that matter) had promised and hoped. Third-quarter same-store sales were about as bad as they get -- down 26% year over year. But can't people admit that this is quite possibly the largest transformation ever undertaken by a public company of this size? And, being such a formidable challenge, isn't it reasonable to accept it is a multiyear effort?
Ron Johnson admits that mistakes were made in 2012 -- the first full year of transformation for J.C. Penney. The elimination, and reintroduction, and re-elimination of coupons was confusing to shoppers, and ultimately alienating for some. The abrupt abandonment of a decades-old model shocked some of the store's core shoppers -- old ladies with limited income. The result was a short-term plunge that killed what little motion the company had going from its past before its future was allowed to take off.
Let's get over the past, folks. It is of no surprise at this point that the old big-box model is holding hands with the PC and walking into the fields of Elysium. Stop dwelling on the failed model that the company has long left in the dust, and allow the new one to take a shot.
In a CNBC interview on Wednesday, Ron Johnson said he is confident that 2013 will be a year of growth for J.C. Penney. You might say that shouldn't be hard to do, given the dismal results of 2012; but this is an inflection point. If you have been to one of the still-few renovated stores, you may have noticed something different -- it's not completely empty. While less than 15% of current floor space has been converted to the new "jcp," it is earning $269 per square foot -- $135 more than the old model, or about double. This hasn't been enough to excite investors and analysts -- but it should be.
The biggest coupon of all
J.C. Penney may not be couponing on a frequent basis like it used to (it currently has a "spend $10, get $10" not-coupon circulating), but the company is selling one thing at dirt cheap prices -- its shares.
JCP is priced as if things will never improve from where they are today. It is priced as if the store transformation will remain at 12% of total square footage. It is priced as if $134 per square foot will be its earnings in perpetuity. The stock price takes into account the massive capital outlays of 2012 and the future, but it does not recognize the benefits of those expenditures. Johnson's elimination of legacy systems and overall operating efficiency efforts have already saved in excess of $1 billion and will continue to do so in the future. There are only a handful of mini-boutiques currently available in that 12% of renovated store space. By the end of the process, there will be 100. This is all funded by company coffers -- no additional debt to be found.
Now, this stock is not for the get-rich-quick, the frequent-stock-checker, or the light sleeper. J.C. Penney is a soon-reversing deep-value play that will reward the multiyear, patient shareholder who believes in Ron Johnson's efforts, mistakes and all. I'm not expecting sales to blow estimates out of the water anytime soon, but I do have faith in that $269-per-square-foot seed of future earnings potential. As a rare shopper and all-around retail curmudgeon, I too am reluctant to admit that a J.C. Penney could ever become a shopping destination. But I am of the (increasing) few who has seen the new mini-boutiques, and it's truly compelling.
Retail requires tremendous innovation to remain relevant in the attention-deficient consumer environment. And, as with any true disruptor, J.C. Penney will have to claw at every customer to show why it's the future of mall shopping. Mr. Johnson, you can mark one early adopter off the list.
