2013 was a challenging year for J. C. Penney Company (NYSE:JCP). Its share price plunged more than 56% last year, from $20.84 per share to more than $9.15 per share. During the last two years, the company's revenues decreased, loss increased and gross margin declined.
One of the main reasons for the decline in revenues was the removal of private brands from J.C. Penney's stores. This led to a sharp decline in customer traffic, which largely affected sales. Private brands such as Arizona, St. John's Bay, Worthington and Stafford offers 4%-5% higher margin than the new offerings. The company has reinstated the private brands and clearing out old inventory that will help to improve gross margin and drive customers back who ceased shopping due to the lack of these products. These private brands were nearly 55% of the company's total sales in 2011 and 2012. Increasing the higher margin private brand sales back up to 55% could reduce the company's loss by millions.
Last year, J.C. Penney rehired its former CEO, Mike Ullman. Ullman is an experienced retail industry executive who has led consumer and luxury goods businesses both domestically and internationally over the past thirty years. Under the management of Ullman, J.C. Penney has given quality guidance that they normally attain. They set reasonable standards and have been historically correct with their benchmarks.
Ullman has been spearheading the effort to return J.C. Penney to its former success, and so far has been quite successful. In the third quarter of 2013, the company saw significant sales increases in some of its largest national brands including Nike (NYSE:NKE), Levi's, Carter's, Dockers, Alfred Dunner, Vanity Fair and Izod. Other product offerings like Modern Bride and Sephora continue to restore customer loyalty and improve traffic to its department stores. Sephora shops are the most successful part of the company. During the third quarter, the company opened 30 new Sephora shops inside J.C. Penney locations, bringing the total number of Sephora locations to 446. Sephora will continue to develop its brand recognition, and continued expansion will be a positive revenue driver. The J.C. Penney and Disney (NYSE:DIS) partnership has so far been successful and will remain a growth catalyst in the future. This will not only increase the children's apparel revenue segment, but usher in customers that will most likely purchase other products in the store.
Returning to the old pricing strategy is high on the list of priorities for J.C. Penney's management team. The company has hired new marketing executives and established new marketing strategies that have proven successful. The first real test for the new strategy was back-to-school, which resonated strongly with target customers and had a substantial impact on revenues for the quarter. They will continue to move away from everyday low prices and towards coupons, loyalty discounts, and membership rewards.
With the efforts of the CEO and its management, all the segments of J.C. Penney's are improving, except Home, which is still underperforming. The company is working to fix its home-goods department, important traffic drivers that were damaged by the previous management's attempts. It is renovating the home department, sorting items by category versus brand and stocking basics. Penney plans to complete the renovation process in March of this year. With the completion of renovation, restructuring expenses will decrease and the cash position will improve. The company is also adding about 2,800 mobile checkout carts and 1,400 permanent cash registers. By adding new checkout carts and cash registers, customers will have an easier time shopping for what they need and an overall more pleasant experience in the store.
J.C. Penney operates in the Department stores industry. Growth of the industry is heavily dependent on two factors: Per Capita Disposal income and customer confidence index. Disposable income per capita is expected to increase from $32,897 in 2013 to $37,957 in 2019. The consumer confidence index in the U.S. also climbed to a five-month high in January 2014 to 80.7, up from 77.5 in December. The consumer confidence index is projected to increase further in the next five years. Improving economy and increasing income levels will also help the company to improve sales.
Patience is the key word while investing in J.C. Penney. With the old management back in place, there is a strong possibility that the company will survive and reach to previous highs. It will be tough but possible. The reinstatement of private brands will drive consumers back into stores. In my opinion, J.C. Penney is an attractive investment opportunity for long-term investors.
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.