Why J.C. Penney's Latest Initiative Still Isn't Good Enough

J.C. Penney just announced it will close 33 underperforming stores. Will it be enough?

Steve Symington
Steve Symington
Jan 16, 2014 at 7:05PM
Consumer Goods

J.C. Penney Stock

Source: J.C. Penney.

Heads-up, J.C. Penney (NYSE:JCP) investors, because your company just announced what it's calling a "strategic initiative to advance [its] turnaround."

So why was J.C. Penney stock down more than 5% this morning?

Well, the strategic initiative simply involves closing the doors of 33 underperforming stores -- and, with them, cutting about 2,000 jobs -- so J.C. Penney can "focus its resources on the Company's highest potential growth opportunities." The end result, J.C. Penney said, will be annual cost savings of roughly $65 million beginning this year -- that is, after it's done absorbing a total of roughly $43 million in pre-tax charges to facilitate the closings.

Meanwhile, the department store chain assured investors it's still continuing with plans to open one new store later this year in Brooklyn.

To his credit, CEO Myron Ullman said in a press release that the closings were a difficult decision to make, but insisted, "As we continue to progress toward long-term profitable growth, it is necessary to reexamine the financial performance of our store portfolio and adjust our national footprint accordingly."

Here's why it may not help
That seems fair enough, but remember we're still only talking about roughly 3% of J.C. Penney's 1,100-store base.

This is the bottom 3%, which means these stores' share of J.C. Penney's broader underperformance is likely disproportionate. Even so, today's "strategic initiative" was also notably devoid of any useful information regarding just how well J.C. Penney's turnaround is actually progressing, leaving already wary investors to fear the worst.

After all, just last week J.C. Penney stock plunged after the company issued a brief, vague press release that simply reiterated its existing guidance, while at the same time asserting it was "pleased with its performance for the holiday period." That guidance, however, didn't exactly set a high bar in calling for comparable-store sales and gross margin to improve both over its most recent mediocre quarter and its absolutely dismal results in the same year-ago period.

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And when we remember that J.C. Penney achieved a whopping $489 million net loss in the last quarter alone, $65 million in annual cost savings seems like a drop in the bucket.

More pain ahead?
Thanks largely to a fresh cash infusion from a massive secondary stock offering in September, J.C. Penney won't be adding the dreaded "Q" after its ticker anytime in the near future.

But in the end, if J.C. Penney can't stop beating around the bush and successfully stem its losses soon, I think shareholders are in for plenty more pain.