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Can Disney's 'Frozen' Save JC Penney Company Inc?

By Daniel B. Kline – Oct 15, 2014 at 11:00AM

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Huge demand for merchandise from the hit movie has brought shoppers to any store which might have it.

J.C. Penney (JCPN.Q) has had a rough go of it in recent years. The company suffered through the disastrous tenure of former CEO Ron Johnson who nearly drove it to bankruptcy by abandoning its core business, and implementing a strategy that pushed customers away.

Now, however, under Myron Ullman, who both preceded and followed Johnson as CEO, the company has shown some signs that it won't be joining the long list of one-time famous brands which are no more. A key driver of Ullman's turnaround has been a merchandise deal with Disney (DIS -0.27%) which is being expanded into store-within-a-store shops inside a select number of J.C. Penney locations.

Johnson may have driven customers away by eliminating sales and making other changes which longtime shoppers rejected, but the lure of merchandise from Disney's blockbuster movie Frozen is helping to bring people back.

J.C. Penney even ran a commercial apologizing for the changes made under Johnson. Source: YouTube 

How bad was/is it?
In his first year as CEO, Johnson, who joined J.C. Penney from Apple (AAPL -0.92%), led the company to a 25% drop in sales volume, The Wall Street Journal reported. 

Johnson, who led Apple's successful retail stores before taking the Penney post, would only last another five months in the job before being replaced by Ullman in April 2013. 

Turning to Ullman was a sign from the J.C. Penney board that it believed returning to its roots was a good idea. There are some signs that the new/old CEO will be able to rescue the company from the depths his predecessor led him to. 

For the second quarter, J.C. Penney reported net sales of $2.8 billion compared to $2.66 billion in the second quarter of 2013. Same store sales increased 6 % for the quarter. Online sales through were $249 million for the quarter, up 16.7% versus the same period last year.

J.C. Penney is making changes again, having recently hired Home Depot executive Marvin Ellison to the top position. I'd imagine Ullman's prior strategy for Disney is likely unaffected.

What are the Disney plans?
Ullman represents stability and was a clear sign to customers that the chain wanted to go back to what it was. The CEO, however, acknowledged when he took the job that he could not live in the past.

"I wouldn't recommend that we go back to the way J.C. Penney was when I left. Things change," he told the Journal.  "There's no reason to try and alienate customers who want to try and shop at J.C. Penney."

One of the key changes Ullman has made is improving the company's relationship with premium brands -- one of which is Disney. That effort started at exactly the right time because as a Disney partner, J.C. Penney had access to merchandise from Frozen, which has been selling out in Disney's own stores and at its other retail partners including Target (TGT 0.40%) and Toys R Us. That means that customers who might have been turned off by Johnson's changes had a reason to visit J.C. Penney again -- even if it's a last step, desperate visit undertaken only to stop children from crying.

As part of his extensive turnaround efforts, Ullman plans to open more than 100 additional Disney-branded Shops inside J.C. Penney by back-to-school 2015. Frozen may not be quite as crazily in demand by next fall, but Disney movies have very long lives since there is always a new group of kids aging into them.

Being a Disney partner has helped bring people back to J.C. Penney and increasing the relationship will bring more in -- even if they are being dragged there by their children.

Can J.C. Penney be saved?
Current management has improved the company's situation and its not banking on Disney alone to save the retailer. In addition to the Disney stores-within-a-store, the company is adding more Sephora locations inside its locations. J.C. Penney is also testing a similar arrangement  with Hallmark in 15 stores this fall. Those store-within-a-stores would sell greeting cards, gifts, ornaments, holiday décor, and more.

It's not all smooth sailing ahead as the company has already warned that its third quarter numbers will "reflect softer selling than expected during the month of September due to lower levels of clearance compared to last year and the continued difficult retail environment." Still, J.C. Penney expects same store sales to grow in the low-single digit range for the period, which is a huge improvement over where it was under Johnson.

J.C. Penney has a long way to go before it has dug out of the hole created by Johnson, but partly due to Elsa, Anna, and Olaf, the chain can finally see less chilly days ahead

Daniel Kline owns shares of Apple. He has rarely, if ever, shopped at J.C. Penney and he has not seen Frozen. The Motley Fool recommends Apple and Walt Disney. The Motley Fool owns shares of Apple and Walt Disney. 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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