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Why J.C. Penney's Home-Goods Move Is No Game-Changer...Yet!

By Daniel Jones – Mar 17, 2014 at 2:57PM

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Now that J.C. Penney announced it would be relaunching its home-goods section, some investors might think the move will greatly improve operations. While this is a possibility, shareholders shouldn't base their investment thesis on the latest development.

Source: Wikimedia Commons

Reuters reported that J.C. Penney (JCPN.Q) would be relaunching its home goods section. At one time the divisino was a traffic generator for the retailer. But in recent years the business turned away from home goods in favor of higher-priced products. Customers, meanwhile, left for competitors like Kohl's (KSS 0.37%) and Target (TGT 0.24%). Now that J.C. Penney is returning to its roots, does this provide shareholders with the opportunity to buy shares on the cheap?

What the home-goods business means to J.C. Penney
As recently as 2008, J.C. Penney's home-goods division accounted for a whopping 20% of its top line. In a nutshell, the business was comprised of lower-priced products like towels and comforters, many of which were private-brand items. While focusing more on these products may distract from name brands, private labels tend to carry higher margins.

J.C. Penney's move will also allow the business to more effectively attract its previous customer base. After Ron Johnson took over as CEO, he decided to renovate 600 of the company's largest locations, offering store-within-a-store concepts that featured name brands like Martha Stewart Living Omnimedia. Since Johnson's ouster and the reinstatement of Mike Ullman as CEO, the idea has evolved to include deals with big players like Walt Disney.

Now, however, with the realization that providing home-goods products will attract more customers, it seems management is working to undo Johnson's legacy. While it is possible that J.C. Penney will be successful in its efforts to attract more customers, it would be foolhardy to think that this alone will turn the company around.

Source: J.C. Penney

You see, the home-goods division's fall from grace was not the work of Johnson alone. As we can see in the table above, home-goods sales in relation to revenue had been falling for a long time. This means that its problems were likely a sign of something other than Johnson's policies.

Admittedly, the operations do appear to have fallen off a cliff starting in 2011, but Johnson did not assume his role at the company until November of that year. This further highlights the likelihood that the retailer's home-goods section was already at risk when Johnson took over; only he made it worse. 

But can J.C. Penney pull it together in a competitive environment?
While it's nice that J.C. Penney aspires to return to its former glory, the company has a lot of work to do. Over the past five years, J.C. Penney has seen its sales decline a jaw-dropping 32.5% from $17.6 billion to $11.9 billion; challenging industry conditions and customer disenfranchisement from a failed turnaround strategy have greatly impaired the business.

This stands in stark contrast to the results of Kohl's and Target, both companies that have a strong home-goods mix. Over the same time frame, Kohl's has seen its revenue rise 10.5% from $17.2 billion to $19 billion; Target's revenue climbed a slightly more impressive 11% from $65.4 billion to $72.6 billion.

Foolish takeaway
Right now, J.C. Penney's efforts to relaunch its home-goods section looks like a good thing. In the long run, this has the potential to generate additional revenue for the business, but it's important to keep two things in mind.

Firstly, the business was already struggling to keep the section a major part of its operations when Johnson took over. Therefore, it's safe to say that this source of revenue is not easy to maintain, let alone increase. Secondly, when other retailers in the picture like Kohl's and Target are also struggling, the company will likely be hard-pressed to create significant value from its move overnight; the price competition could prove challenging to overcome.

None of this means that the company's decision is a poor one, nor does it mean that it will be impossible to create value in the long run. But it does suggest that investors shouldn't expect shares to skyrocket as a result. Rather, any value created by this move will almost certainly arise over an extended period. The retailer could face a bumpy road during the early phases of implementation.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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