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2 Changes Coming for J.C. Penney

By Brandy Betz - Jan 20, 2014 at 9:20AM

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J.C. Penney follows Macy's lead -- but will the changes help revive the struggling retailer?

J.C. Penney (JCPN.Q) continued its turnaround efforts with this week's announcement of two significant changes coming soon. The company will join Macy's (M 2.20%) in closing stores as a cost-cutting measure. J.C. Penney also plans to reinstate commissions for select salespeople in hopes of motivating more sales of big-ticket items. The announcements come a week after the company issued a vague holiday sales report that sent shares plummeting more than 10%. 

Here's a look at what the company plans to do in the coming months -- and what J.C. Penney needs to do to inspire investors. 

Store closures
J.C. Penney plans to close 33 stores to save approximately $65 million a year. The closing stores have a wide geographic spread, account for about 3% of the chain's total store count, and will eliminate 2,000 jobs. The closing stores will sell all remaining inventory before the closings complete in May, which will likely involve margin-constricting price markdowns. J.C. Penney will take a one-time charge of $26 million in the fourth quarter. An additional $17 million charge will appear in future reports.

The 33 stores were likely vastly underperforming, even by J.C. Penney standards, which is saying a lot right now. But Penney isn't the only chain cutting stores to save money this year.

Macy's recently announced plans to close five stores, eliminating 2,500 jobs and amounting to about $100 million in annual savings. The company will book total charges of $120 million-$135 million in the fourth quarter with $50 million-$55 million of that total as non-cash charges.

Store closings notwithstanding, J.C. Penney isn't on an even playing field with Macy's. And that's the problem behind the next planned change.  

Commissions return
Ron Johnson had done away with commissions during his brief reign because he preferred to focus on customer service. Bloomberg reports that J.C. Penney now plans to reinstate commissions for approximately 3,000 employees who work in the fine jewelry and home furnishing departments. The employees will receive a base pay reduction potentially subsidized with a percentage commission bonus. 

On that last part, the devil is in the details. Commissions are common in department stores such as Macy's, but their stores typically have better traffic than J.C. Penney. Even wildly talented salespeople will find it difficult to move diamonds or loveseats if there are no customers in the store. Investors should hope that J.C. Penney will implement the commissions at its best-performing stores to give the salespeople a fighting chance. Otherwise, the chain risks sending valuable employees running for the hills.  

But it will take time to see how much the store closures and commission reinstatement help business. And J.C. Penney needs a more short-term method of appeasing investors. 

Start disclosing
J.C. Penney learned an important lesson from the plunge that followed the company's vague holiday report. It's vital right now that the retailer disclose as many metrics as possible. The truth might still look better than what pessimistic analysts and investors could imagine. 

The company has gone on the record explaining what parts of Johnson's turnaround strategy failed the hardest. But J.C. Penney needs to show what's working now and maintain periodic updates. This could boil down to highlighting the chain's top stores in the nation to show what type of performance is still possible in a J.C. Penney store. 

Foolish final thoughts
J.C. Penney continues on the road to recovery. Store closures were inevitable, and more closures will likely follow. But the commissions reinstatement seems doomed to fail if implemented in underperforming stores. Ultimately, J.C. Penney still needs to focus on its inventory issues and providing more performance details to investors. 

Brandy Betz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Macy's, Inc. Stock Quote
Macy's, Inc.
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