Can J.C. Penney Look Solid In Martha Stewart's Stripes?

Dec.12.11 | About: J.C. Penney (JCP)

By Jeannette Di Louie

New CEO Ron Johnson certainly isn’t resting on his laurels during his first quarter heading up J.C. Penney (NYSE: JCP). Straight out the gate, he shook up the rest of the management team, and now he’s making trades with Martha Stewart.

Hold the jokes please, since this time Stewart appears on the up and up. But whether she can bring profits to the beleaguered J. C. Penney is another story altogether.

Johnson certainly thinks his company can, since he’s buying up a 16.6 percent stake in Martha Stewart Living Omnimedia (NYSE: MSO) – complete with representation on its board – to the tune of $38.5 million.

The deal involves the houseware guru setting up “mini-stores” within the majority of J.C. Penney locations across the country. Although all of the details haven’t yet surfaced, those mini-stores will doubtlessly sell Martha Stewart-approved goodies.

But that’s not all they’ll offer. According to The New York Times, they’ll also be stocked with “trained employees” to “provide advice and tips”… which most people can easily get off of the internet or in countless home improvement magazines.

Maybe not the most brilliant marketing ploy available.

So it shouldn’t come as any surprise then that J.C. Penney stock actually fell a bit on the news… while the market jumped all over Martha Stewart, sending her stock up 31 percent.

The Ron Johnson Magic

Well before he was running J.C. Penney and negotiating with Martha Stewart, Ron Johnson made a name for himself with Apple (Nasdaq: AAPL).

Once upon a time, Apple was only wildly popular for its iPods, iTunes and iPhones. When it came to computers, the brand still mainly appealed to tech snobs and tech snobs only.

But then in came Johnson with his grandiose ideas for an Apple Store… and the rest, as they say, is history.

These days, it’s hard to walk into a mall that doesn’t feature an Apple Store, which are usually hopping. The cheerfully lit shops are filled with expert personnel to help with broken or faulty devices, and even faulty consumers who can’t quite figure out how to turn their products on.

Altogether, the stores make Apple much more consumer-friendly and therefore much more profitable. With that kind of success under his belt, it’s understandable that Yahoo!’s Daily Ticker writer Henry Blodget labeled Johnson a “Retailing God.”

Nor was he alone in that opinion. J.C. Penney stock shot up 17.5 percent on the news alone that the legendary marketer was switching teams.

But one success – even an enormously impressive one – doesn’t necessarily make him an-all around expert.

J.C. Penney Is Probably a Different Story

Back in June, my Investment U colleague Justin Dove wrote about J.C. Penney’s then-incoming CEO. And in that article, he mentioned how “some pundits, such as Seeking Alpha contributor Adam Gefvert, don’t buy the hype surround Johnson.”

Investors can add retailing expert Howard Davidowitz of Davidowitz & Associates to that list. At the time, the analyst pointed out that much of the Apple Store’s success comes from the company’s exclusivity.

After advising to “short the stock,” the analyst broke his opinion down: Apple has “unlimited money [with]… the greatest products… It’s all about the product.” J.C. Penney, on the other hand, is a “tired old apartment store [without]… a lot of money to fix things up. What the hell is Ron Johnson going to do?”

Clearly, we’re seeing the answer to that question in the upcoming Martha Stewart mini-stores, which – let’s face it – sound a lot like the Apple Stores in an industry that isn’t anything like Apple.

While the scheme will certainly bring in new traffic, it’s highly doubtful that it can bring in $38.5-million worth.

With his past successes, not only with Apple but also with Target, Johnson might very well be able to somehow pull this one off. But the odds are stacked high enough against him that it doesn’t make much sense to bet that he will.

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