J.C. Penney: Wait For Results, Not More Hype Over Johnson

Jan.23.12 | About: J.C. Penney (JCP)

Retail is one business where customer perception can become reality. J.C. Penney (NYSE:JCP) has become an ailing staple in malls across America. Macy's (NYSE:M), Target (NYSE:TGT) and Kohl's (NYSE:KSS) all sit nearby. When a customer goes to the mall he or she thinks back to his or her last experience in each of these stores. For most, JCP does not take the top slot for being the best-priced, merchandised, customer oriented, or having the cachet of its competitors. Although ranking 146 on the Fortune 500 Best Companies to Work For, JCP does not rank on any of the sort in customer perceptions. This marks a pivotal time for JCP because a new executive team is in place and poised to bring the 110-year-old retailer into the 21st century. The question is whether or not this time will be different from the last CEO Transition, Myron Ullman, that brought little to no change to the bottom line of JCP.

The Numbers Don't Add Up:

The root of the problems for JCP is within the financials of the company. JCP currently is holding $3.1 billion in debt and is losing money on a quarter-to-quarter basis. The Associated Press reported that "[The company] also now expects a fourth-quarter loss of 45 cents to 30 cents per share, because of lower sales and higher discounts." On this current trajectory, the company will continue to bury itself in debt and be forced to lower prices even more to hold market share. The company's stock on the other hand has rallied nearly 16% since its November lows. JCP is currently trading at 46 times earnings. TGT, a much stronger retailer, is only trading at 12 times earnings. This financially does not make sense, but the lurking variable is Ron Johnson, the newly appointed CEO. Investors are betting on his success in turning the retailer around, as he has done at Apple and TRGG.

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(Click to enlarge) (CNBC)

Can One Man Turn Around the Ailing Retailer?

One of the first strategic decisions Ron Johnson made upon arriving in Plano, Texas was taking a $38.5 million stake in Martha Stewart Living Omnimedia (NYSE:MSO). He hopes that this will allow Martha Stewart Living to take a more central role in JCP and bring new life to the antiquated retailer. These are the types of decisions he made in his past executive positions at Apple (NASDAQ:AAPL) and TGT. While at AAPL, Johnson developed the Apple Store and put forth revolutionary concepts like the Genius Bar. In an interview with the Harvard Business Review he stated "People come to the Apple Store for the experience-and they're willing to pay a premium for that." The problem lies in the fact that JCP is a completely different company and what investors are hoping is that he can bring this level of change and innovation to JCP. He built the Apple Store from the ground up; he helped TGT in merchandising. What these two things have in common is that they began out strong. On the flipside, JCP is in a depressed state and it is far more difficult to overcome the hurdle of a depressed company than to create a new concept.

Listen to Dennis Gartman and Wait to Invest:

Dennis Gartman, respected economist and writer of thegartmanletter.com, has 22 tenants of his investment strategy. Rule number four is: "The objective is not to buy low and sell high, but to buy high and to sell higher." This fits the situation perfectly for JCP. There is no reason to take excessive risk in buying the depressed company on "hype" of whether Ron Johnson will be able to turn around the retailer and bring it back to being a retail superpower. The key is to follow the company intently and buy when tangible progress has been made. To buy now would be to speculate that Johnson can do the same at JCP as he did at AAPL and TGT. Listen to Dennis Gartman in this case if you want to minimize risk and exposure to a stock performing on hope and not results.

Conclusion:

Due to the disparity between the performance of the company and the performance of the stock, it is best to stay away from JCP and wait until the company delivers several strong quarters of sales, profit, and margin growth. Even if Johnson outlines a grandiose future at his investors meeting on February 1st, do not buy JCP on the speculation, but rather wait for tangible changes. Buy high, and sell higher to minimize risk and bet on true financial achievements, not hot air.

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