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Don't Dismiss J.C. Penney Just Yet

By Jeremy Bowman - May 19, 2016 at 1:11PM

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The department-store chain has tumbled over the last couple of months, but its comeback is still on track.

It's been an ugly earnings season for retail stocks.

Department-store standbys like Macy's (M -1.91%)Nordstrom (JWN -1.75%)Kohl's (KSS -19.64%), and J.C. Penney (JCPN.Q) have all gotten bloodied as the category takes a hit from shifting shopping habits. While those companies saw comp sales skid over the last quarter, consumers are marching instead to home-improvement retailers, restaurants and bars, and even off-price rivals like TJX Companies, whose combination of location, discounting, and the "treasure hunt" experience seem to be drawing consumers from more traditional clothing stores.

J.C. Penney fared better than its closest competitors, but it also posted its first comparable-sales decline in 11 quarters, prompting a new wave of worry to wash over the stock. Shares are down about 40% since their peak in March, following a strong holiday-quarter earnings report.

Given the swoon, there are certainly reasons to doubt the retailer's comeback. Its debt burden remains near $5 billion, and the company is still posting quarterly losses as opposed to rival department store chains that remain comfortably profitable. Still, the venerable retailer is making a number of improvements under the guidance of new CEO Marvin Ellison that should make the company solidly profitable and propel the stock higher.

Expanding appliances rollout

Earlier this year, J.C. Penney tested selling appliances in a pilot program in 22 stores. The move surprised observers, as the retailer hadn't sold a dishwasher or range in 30 years, but it was a canny decision, coming from recognizing an unmet opportunity. Customers were searching for appliances on Penney's website, and rival Sears Holdings (SHLDQ), with whom Penney is a co-anchor at hundreds of malls, is imploding, and fast ceding appliance sales along with it. 

The company announced this month that it will expand appliance sales from 22 stores to 500 locations and starting in July after a successful pilot. That rollout should help boost sales toward the back half of the year. 

Targeting plus-size women

Recognizing another unmet opportunity in retail, J.C. Penney launched a new in-house clothing brand for plus-size women called Boutique+. The retailer partnered with "Project Runway" winner Ashley Nell Tipton to launch the new line, which became available in 500 Penney stores and on May 1. Plus-sized clothing has long been an untapped market in apparel. A report from Bloomberg Gadfly indicates that the market for plus-size women's clothing is estimated at $20.4 billion and is largely ignored by major fashion labels, and even retailers. It's also growing, up 17% from 2013, and could grow even faster if retailers would focus on it. The average American woman is plus-sized, between a size 16 and 18, yet only fewer than 16% of dresses at major department store chains are made for plus-sized women. Boutique+ could be perfectly situated to take advantage of this market.

Driving traffic in other ways

J.C. Penney is also leveraging some of its other advantages. Its partnership with Sephora has long been a lucrative one -- perhaps the best decision the company has made in the last 10 years. It recently announced it would expand Sephora's presence to 60 new locations as they're now in more than half of Penney's 1,000 stores. Sephora has been a proven traffic driver for J.C. Penney and a way to add revenue per customer.

The company pulled a similar move last year, partnering with In Style to rebrand its salons. Offering services such as hair salons bring in regular visits and incentivize customers to shop in the rest of the store. Ellison's strategy to give the consumer more reasons to visit the store makes sense in an age where e-commerce makes almost available with a mouse click. Complementary products and services are more likely to drive frequent visits as well. A woman may be more interested in a visit to Sephora after getting her hair done, for example.

In addition to expanding appliances to half of the company's stores, J.C. Penney is giving more floor space to products like window coverings and flooring, with a new partnership with floor specialist Empire Today. In doing so, Ellison is borrowing a page from his former employer, Home Depot, where he was executive vice president of stores, and tapping into a growing segment of retail home improvement to counteract the slump in apparel.

J.C. Penney's comeback won't happen overnight, but unlike most of its rivals, the company is making meaningful changes that will bring customers into its stores. Though comparable sales fell last quarter, the dip was much smaller than in other department stores, and management was confident enough to maintain its full-year guidance of 3%-4% in same-store sales growth. If it can hit that figure, better things will surely be in store for J.C. Penney investors.

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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.
$17.97 (-1.91%) $0.35
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
Kohl's Corporation Stock Quote
Kohl's Corporation
$28.68 (-19.64%) $-7.01
Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
$20.76 (-1.75%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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