J.C. Penney (NYSE:JCP) is a holding company whose principal operating subsidiary is J.C. Penney Corporation Inc., or JCP. JCP has grown into a major discount retailer, operating 1,104 department stores in 49 states as well as Puerto Rico. The primary business consists of selling clothing and merchandise through retail outlets, as well as through JCP.com.
There have been major discussions in regards to the livelihood of the retailer; ever since Ron Johnson's CEO tenure was a failure, leading to replacement by returning CEO Myron "Mike" Ullman. The article "Is The TJX Company Taking Over For J.C. Penney?" discusses whether discount retailers such as TJ Maxx (NYSE:TJX) and Marshalls are the stealing market share away from JCP.
How are Consumers Reacting?
Consumer's reactions to all of the chaos at JCP are the most important aspect to analyze. After reading "Beating the Street" and "One Up On Wall Street" by Peter Lynch, I learned to analyze investments by following consumer trends and by visiting malls. Crowds in JCP's retail stores have increased slightly, but it's difficult to tell if people are making purchases or simply browsing. A recent article in Forbes details some consumer reactions, which I believe are important to reference. Dana Manciagli from Seattle, Washington expressed her discontent with the removal of sales and coupons, after expressing that she grew up shopping at JCP. She later mentions the store redesigns negatively; "Then, the upscale mini-shops were not appealing to me. Why? Because the J.C. Penney brand, to me, meant that I could find my basic things - t-shirts, jeans, kitchenware and more - in the right size/color, virtually all the time. I don't want Martha Stewart-looking stuff."
Other shoppers also expressed discontent with the redesign of the store layouts and the removal of sales. An issue with the redesign not frequently discussed is how older consumers felt alienated by the changes. JCP's long-time consumers loved the coupons and sales and the easy to navigate, simple store layout. Removing many of consumer's favorite JCP brands made customers feel like they weren't being listened to.
Personally, I would be more likely shop at JCP more if they offered consistent pricing that I feel offers good value, as well as an easy shopping experience. The marketing materials that have been distributed via mail catalogs, newspapers, and television ads I feel were well done. However, many older consumers disagree with me. Regardless, the advertisements were not effective in producing sales.
Customers did mention that they would be willing to give JCP a second chance. If JCP can show consumers that they are listening, and that they do care about the feedback they received, JCP can turn things around. Going back to a simple, reasonable place to shop with the old style of management should prove profitable for the company.
Reasons to Stay
1.) Brand Recognition- JCP is a company that has been around for decades, and is a brand that many people respond to. Many of the customers and former customers in the previously mentioned Forbes article discussed how they grew up shopping at JCP, and have been a loyal shopper there for years. In addition to the recognition of the JCP name, they also offer brands that consumers have grown to love. Some of their best-rated brands include Arizona, Levis, Izod, Claiborne, and others. JCP has also agreed to bring back former consumer favorite, St. Johns Bay.
2.) Catalysts- JCP is focusing on creating specialty department store experiences for their customers. JCP has spent significant efforts re-organizing its retail outlets in order to create separate unique specialty stores known as "The Shops." After a recent visit to a JCP retail store, I discovered that the "shops" are organized into small subdivided sections for each brand, and often the shop is designed in a style that fits the style of that brand. Some brands, such as Levis even offers Apple (NASDAQ:AAPL) iPad interfaces, which allow customers to view and browse various Levis jeans selections.
3.) Billionaires Backing- George Soros, the billionaire hedge fund investor is one of the most popular and followed investors in the world. Soros disclosed a 7.9% stake in the company, with 17.4 million shares. In addition to Soros, William (Bill) Ackman has also taken a considerable stake in the retailer. Following the trades of billionaires seems like it may be a wise investing path, but often times it does not work out as well for the individual investor as it did for the billionaire.
4.) Growth Opportunities- JCP is trying to become a more technology savvy company. Potential markets for JCP include mobile sales and a more profitable mobile phone application. JCP can offer select coupons and discounts for shoppers who show their JCP phone app to the sales clerk, as well as do special mobile only sales. The new smartphone app could lure in new younger shoppers, and even increase excitement (and ultimately sales) in current consumers. In addition to promotional online sales, JCP could offer an expanded selection of colors, sizes, and unique offerings online that aren't available in all retail stores. This expanded selection will have consumers leaving the stores to go online at home to continue shopping. Many companies have explored similar business plans, where the selection online is larger than the selection in store. By allowing other retailers to sell through JCP.com, JCP can take a percentage of each sale simply for providing a brand and marketplace behind each sale. This is simply speculation, but this increased revenue could have excellent additional millions in potential new sales, and ultimately boost earnings per share.
5.) Financing- Financing for JCP is both a positive and a negative. Focusing on the positives, Goldman Sachs (NYSE:GS) has recently provided JCP financing secured by their real estate holdings. This financing will allow JCP to stay active while their restructuring and "corrections" occur. This financing will also be used in order to pay off existing debt that is due in 2023. As long as management is able to successfully get sales back to a level to cover expenses, this financing should be enough to maintain operations during the transition period. The stock immediately jumped about 3% on the news.
Reasons They May Not
1.) Price Performance History- Looking at the 10-year performance of the stock, you can see that JCP has been quite volatile. From 2003 until around 2007, JCP was strong, but afterwards JCP was never able to recover from the financial crisis of 2008. JCP currently trades at around $16 a share as of 7/8/13.
Chart Courtesy of Google Finance
2.) Damaged Reputation and Increased Competition- The damaged reputation and alienation of long-time customers may result in lost customers forever. Increased competition from other discount retailers are a major factor. Stores such as Target (NYSE:TGT), Kohl's (NYSE:KSS), and TJ Maxx and Marshalls are stealing customers from JCP's thrifty client base. JCP faces the risk of not being able to develop merchandise offerings that resonate with existing customers, but also attract new shoppers. Fashion is very quick to change, so JCP must constantly be adapting to changing styles and environments. The retail clothing industry is extremely competitive, including many local, regional, and national retailers. E-Commerce and other online sales have also hurt JCP, as they are quickly working on making up lost ground.
3.) Rebuilding May Not Work- To put it simply, the store remodels with the various different "shops" within each store may not sit well with all consumers. As previously mentioned, many of JCP's long-term customers liked the simplicity and ease of access that the old store designs had. Store redesigns have also been shown to deter consumers from entering a store that is being torn apart by construction crews. The "It's No Secret" commercial where JCP apologized and asked consumers for a second chance came off slightly desperate, but did resonate with some consumers. What concerns me the most is that JCP is forced to rely on debt to finance the store remodels and their reorganization. This will inevitably result in increased costs, especially due to the large amount of interest expense JCP will have to pay back. Financing includes JCP recently borrowing $1.75 billion from Goldman Sachs. On a positive note, this financing will help keep JCP operating while they become reorganized. It may take years before JCP can convince all their former loyal customers to give them a second chance.
4.) Inventory Troubles- Inventory management is an extremely important aspect of running a clothing retailer. Consumer demand is constantly shifting, making inventory control more difficult. Retailers such as JCP must properly execute inventory management strategies, including adaptation to changing demands. Factors such as timely and efficient distribution to various retail outlets, proper use of floor space, and price management are all contributing factors. If JCP overestimates customer demand, excess inventory will have to be sold at prices lower than anticipated. On the contrary, if inventory is insufficient, then missed sales could have an impact on revenues, as well as customer loyalty. Over the past year, JCP has had an oversupply of inventory due to lower than expected sales numbers, which has weighed in on the bottom line.
5.) Workforce- With all the change going on in the past year in JCP, employees are left confused as to what direction their company is going. JCP has had historically high rates of turnover in their entry store level positions, most likely due to transformational changes. Due to lower than expected earnings; bonuses, raises, and other employee benefits have been cut, which has also resulted in higher turnover rates. JCP's success relies on the sales abilities and friendliness of their employees, so without a strong workforce revenues may be hurt. If JCP is unable to attract and retain motivated employees, the goals the company has set may fall short.
Huge Opportunities Online
Clothes shopping is almost considered an American past time, and is particularly popular among women. Significant problems create tremendous opportunities, especially where there is always strong consumer demand to support it. JCP.com was underperforming under Johnson, but now I believe the website will be a major contributing factor in JCP's revival. JCP should reinvent their entire website, bring back sales, and even do online promotions to get people visiting their website on a consistent basis. JCP customers love sales, and one of the best promotional sales tactics online is the "Flash Sale." JCP could easily offer goods at severely discounted prices for short periods of time in order to drum up more website traffic. This type of sale could be particularly effective during Black Friday or the holiday shopping season.
If JCP enacts a plan similar to the one I have outlined, the investment implications for the stock could be huge. Revenues for 2013 are on pace for about $13 billion. Back in 2011 when revenues were $17.8 billion the stock traded at an average of around $30 a share. This represents a potential return of over 50% from current market prices. If the above initiatives are able to formulate, JCP has the potential for a large investment return. Increased sales from new promotions, coupons, website sales, potential mobile sales, and the return of their customer's favorite brands could create billions in new revenue. With billionaire investors like Soros and Ackman making largest stakes in the company, the potential for large capital gains is very real.
Despite the highly depressed share price, I think J.C. Penney stock may still be a gamble at this point. The company should continue to operate for the time being thanks to the financing it has received, but it needs sales to be able to continue operating long term. The new initiatives and store redesigns are enjoyable to many, and all consumers will enjoy bringing back coupons and sales. Billionaires certainly see JCP as a buy, as do some analysts. I see J.C. Penney staying afloat for now, but it doesn't seem as if J.C. Penney stock will be skyrocketing now that Ullman is back at the reign.
Disclosure: I am long AAPL. 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.