J.C. Penney: The Plus-Size Opportunity

| About: J.C. Penney (JCP)

Summary

After the recent 18% 30-day decline in J.C. Penney's stock price, we believe that the Boutique+ announcement could not have come at a better time.

Apart from having a great PR advantage, the initiative has the potential to expand J.C. Penney's TAM which will subsequently enable J.C. Penney to generate more revenues per customer.

This possibility stems from J.C. Penney's Sephora & Salon initiatives. Initiatives that helped J.C. Penney attain the 3-year 3% sales-growth-rate. Therefore, an expanded TAM has potential to accelerate the 3%-growth-rate.

(Source: Plus Size for J.C. Penney ) Click to enlarge

Thesis: J.C. Penney Is Getting Women

Women have always been instrumental to the growth of J.C. Penney (NYSE:JCP). This significance is embodied by the J.C. Penney's sales contribution from women.

(J.C. Penney Company, Inc., 2015-10-K, page 3) Click to enlarge

Since "footwear" is ambiguous, we take the average and use handbags only. That implies that ~47% of all sales from J.C. Penney are specifically targeted at women. But we know the actual number is larger than 47% because women are also the target audience in Home, Services & other and Footwear segments shown above.

But women's significance to J.C. Penney's growth prospects transcends these historical numbers. This is so because the success of J.C. Penney's new initiatives such as Sephora inside J.C. Penney and Salons inside J.C. Penney are heavily reliant on the company's ability to drive more traffic to its stores.

This is why we believe that the Boutique+ initiative will help increase J.C. Penney's Total Addressable Market ("TAM"), Public Relations ("PR") image and thus drive more traffic to its stores. Subsequently, we expect J.C. Penney to be able to leverage its wider TAM to generate more revenues per customer through Sephora and Salons inside J.C. Penney stores.

It is important that J.C. Penney expands its topline because over the last month alone, its stock price has declined by ~18%. Therefore, we believe that initiatives like this one have the potential to bolster investor confidence, enable the stock to continue on its upward trajectory and remind bears that the turnaround is real.

(Source: Nasdaq - J.C. Penney Company, Inc. Holding Company Interactive Stock Chart) Click to enlarge

J.C. Penney's Plus-Size Growth Opportunity - The Traffic, The PR & The TAM Opportunity

On April 12th, 2016, J.C. Penney introduced the Boutique+("TM"), its first-ever plus-size fashion brand designed exclusively for the full-figured woman.

"There are millions of incredibly stylish full-figured women who are seeking comfortable, well-fit clothes that offer style and versatility," said Siiri Dougherty, senior vice president of women's apparel at JCPenney. "JCPenney is committed to winning her loyalty by designing an entirely new modern brand made just for her and creating a dedicated shopping environment that respects her time and budget with a greater selection of affordable plus-size fashion that takes into account diverse body types." - J.C. Penney Company News.

There are indeed "millions of incredibly stylish full-figured women who are seeking comfortable, well-fit clothes that offer style and versatility." A MarketWatch article by Tonya Garcia in November of last year pointed to Nordstrom Inc., Target Corp., and J.C. Penney Co. Inc., as companies that have started initiatives signaling a shift in how retailers and labels view the plus-size market.

In our article five months ago entitled,"Hiding In Plain Sight: J.C. Penney's 75% Upside Potential In Less Than 24 Months", we outlined how J.C. Penney's recovery has not necessary come from increased traffic. As a matter of fact, J.C. Penney's CEO acknowledged that they still have approximately the same number of active customers as they did in 2011.

Therefore to expand its topline, J.C. Penney has just managed to increase cross shopping from clients served by J.C. Penney's stores. They managed to do this by increasing the number of Sephoras inside J.C. Penney stores, by introducing Salons inside J.C. Penney's and by focusing on private brands. These initiatives have allowed the company to generate more revenues per customer.

(Source: Authors analysis with data taken from Morningstar) Click to enlarge

Therefore, because J.C. Penney has managed to grow revenues by an average of 3% simply by selling more merchandise and services to the same number of active customers, then expanding its TAM should be a huge opportunity for them. This is because they already have the platform to generate more sales per customer and hence having more traffic will be a great opportunity for them in terms of revenue growth.

But beyond its ability to generate more sales per customer, the Boutique+ initiative is a great idea from a PR perspective. Because of the readily available substitutes in its market, customers with many choices sometimes want to shop in a company that is/seems inclusive. By expanding its TAM via the Boutique+ initiative, J.C. Penney is well-positioned to drive more traffic and subsequently sales in its brick-and-mortar stores as well as online.

Conclusion

The other significant aspect of the Boutique+ initiative is the fact that women are the largest shoppers in J.C. Penney. Consequently, this can help J.C. Penney widen its TAM as women that once felt left out can have yet another reason to visit its stores.

In addition, there will be lucrative ripple effects from the Boutique+ initiative to Sephora and Salons inside J.C. Penney. Sephora and Salons have no size restrictions. Meaning that by expanding its TAM, J.C. Penney can get more women into its stores who cannot only shop for clothes but also buy makeup or do their hair in Sephora and Salons inside J.C. Penney respectively. This is why a potential surge in traffic is good news for J.C. Penney's stock price appreciation. It has the potential to elevate J.C. Penney's top line. This is even better because J.C. Penney has the platforms in place to generate more revenues per customer.

Lastly, in the aforementioned article from MarketWatch, research by Plunkett Research found that ~67% of women in the United States wear sizes 14 to 34. Taking U.S. demographics into account for females just 25 years and older, you are looking at roughly 72 million women (67% of 110,266,275 women). The purpose of the data is not to show an exact TAM for J.C. Penney but rather to show that J.C. Penney can indeed broaden its TAM by tapping into the plus-size market and offering women more and better choices. We believe that it is great initiative in J.C. Penney's turnaround story that is likely to have a positive impact on the company's top line.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JCP over 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.