How Low Can J.C. Penney Go?

| About: J.C. Penney (JCP)

JC Penney's (NYSE:JCP) gamble on Ron Johnson is a failure. Those calling for his firing are right to do so.

But what alternative do they have? Johnson's predecessor, Mike Ullman, was also deemed a failure. The last successful person to occupy the CEO chair at Penney's was Allen Questrom, now semi-retired and working with such companies as Foot Locker (NYSE:FL), Sotheby's and Wal-Mart (NYSE:WMT) as a director and private equity guy.

Questrom called himself "shocked" at Johnson's reign last year. He previously saved the company early in the century, mainly through financial engineering, but the question occurs whether that's possible now.

Most of that cash is now gone. More than a quarter of the company's assets are now debt. Questrom's strategy was to focus on the stores, and he was able to sell assets like Eckerd's and a direct-marketing insurance business to fund stock buy-backs. This strategy is no longer available to Johnson's successors.

Another Questrom success lay in revamping the Penney catalog. An equivalent strategy would be to improve the Penney website, which doesn't look much different than it did in 2004. In other words, it's dated. There's too much focus on the home page, and not enough is being done to lead shoppers inside. Even when they go inside, it's to other brands like Sephora, the "store within a store" idea that Johnson pushed offline, the strategy that failed. These "shops," in turn, lead to static catalog pages.

Penney's has missed the whole SEO revolution. Search the Sephora brand at Google and you're going to be at Sephora's own site, which is frankly superior to Penney's own Sephora site. What you won't find is a way in that starts from products, and it's this "inside-out" use of a website that has been the main Amazon revolution, another concept that Penney's has completely missed.

So firing Johnson won't stop the rot at Penney's. The directors at this point are Johnson loyalists. There's no new direction there. A further collapse in the stock from its present level - the company is now valued at $3.88 billion - might leave it vulnerable to a takeover, but by whom and for what? Does Kohl's (NYSE:KSS) want these locations, moving to the center of malls instead of outparcels, where it's done so well? Does Dillard's (NYSE:DDS) see an opportunity here? It's possible that a privately-held company like Von Maur might want to go national through a takeover, but that would have to be at a liquidation price, with the brand valued at zero and shareholders essentially wiped out.

So while it's possible someone could turn JCP into something, they won't at the present price, and holders are unlikely to get anything like the present price in a takeout. If you're stuck waiting, with Penney shares in your portfolio, you might get a pop on the announcement of Johnson's firing, but that may be your last chance to limit your losses.

When retailers go bust, they really go bust. The only way to possibly make money on Penney's right now is by going short, betting a bit on the board's dithering before the axe swings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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