3 Underappreciated Facts About The JCP Transformation

| About: J.C. Penney (JCP)

The J.C. Penney (NYSE:JCP) transformation has been tough so far. Critics rightfully point to significant drops in same-store sales and disjointed efforts combining the vibrant new shops with the rest of the drab store. Critics fail to appreciate three key points about the shop concept.

Advertising efforts from each shop will supplement JCP's advertising. This has become apparent with March's Joe Fresh launch. Joe Fresh is a Canadian-based clothing brand described as stylish and affordable. Its decision to roll out in America through JCP was a huge coup for Ron Johnson. There have already been a few local newspaper stories talking about Joe Fresh's launch, and there will be many more from now until March. Joe Fresh has a flagship store in Manhattan, but that's about it for its American presence. It's likely brands like Joe Fresh will advertise that they can be found in JCP, drawing shoppers to the stores. Joe Fresh is also active in social media and will build meaningful word of mouth advertising.

Joe Fresh won't be alone. JCP will eventually roll out 100 shops by 2015, most of which will advertise that they can be found at your local JCP store. If you're attracted to the Disney shop within JCP because of an ad, you'll have to walk by Sephora and Levi's and Joe Fresh and Tourneau. 100 shops mean 100 social media accounts, at least occasionally encouraging shoppers to visit their shops within JCP. It truly leverages the power of each brand and should increase sales across all brands within the new JCP.

Exclusive products defeat Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). These companies compete on price and convenience. There are two ways to beat them: provide products that can't be found on those platforms and provide a unique and attractive in-store experience. JCP is certainly making positive strides towards providing a better in-store experience, with the introduction of Caribou Coffee (NASDAQ:CBOU), and eventually entertainment and things like cooking and yoga classes. Those aren't here yet, though.

I'd like to focus on the exclusivity. Toys "R" Us (TOYS) has done a great job of providing exclusive toys, especially around the holidays. There are places in the United States where Toys "R" Us isn't present, so interestingly enough, you'll often find those toys made exclusively for them being sold on eBay at higher prices because shoppers don't have access to them elsewhere. This means that some eBay sellers will buy up items at the local store, and sell them online for a profit. You typically won't find those exclusive items online at a discount.

Joe Fresh does not sell its items on its website. JCP will. That's exclusivity. Tourneau will sell an exclusive line of watches at JCP. So will Disney. It's likely many of the other brands will do the same. That doesn't mean you won't see those items on Amazon, or re-sold on eBay. It will be more rare, though, and likely at higher prices than at JCP.

JCP has a poor website. How is this an underappreciated fact? It can only get better. Sales at JCP's website have been particularly disappointing. It clearly hasn't been a focus... yet. However, JCP recently revamped its Facebook page. It has also been extremely active on Twitter, promoting the new brands and often replying to customers who have had bad experiences at the store. It's obviously dedicated resources to social media, but has done little to its actual website. That will change and the company's online sales will improve. Joe Fresh and other brands will help, as will continued integration of its inventory tracking software and back office. Expect a re-launch this year.

Investors often make the mistake of buying into a stock after good news has already been announced. In this case, it would be like buying after JCP's website is fixed and higher online sales have been announced. That's a mistake. It's better to buy at the point of absolute pessimism because the worst-case scenario is already built into the stock price and any improvement leads to large gains.

It may be difficult to see right now, but these three underappreciated facts will be very helpful to investors. The first two are why it is so necessary to make the changes Ron Johnson is making. The third provides a tremendous opportunity for investors.

Disclosure: I am long JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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