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Dave Dierking has been trading and investing for over 20 years and works doing asset/liability management and interest rate risk modeling for a global bank. He has a Bachelor's degree in Finance from Michigan State University. Sign up to receive an e-mail whenever I publish an article! Click on... More
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  • 4 Steps To A J.C. Penney Turnaround

    J.C. Penney's (NYSE: JCP) first quarter earnings report is a little over a month away and it's quickly becoming make-or-break time for the retailer and its new (as well as former) CEO Mike Ullman. His predecessor Ron Johnson came in with much fanfare a little over a year ago with promises of turnaround, but so far revenue, earnings and customer traffic numbers are all headed in the wrong direction. It's clear that Ullman has a long road ahead.

    I wrote not too long ago detailing all the evidence that's piling up against J.C. Penney and suggested that the company may not survive much longer if it doesn't start turning things around.

    What's gone wrong at J.C. Penney has gotten a lot of press lately, so instead let's take a look at what the company needs to do right to get headed in the right direction again. Not all of these ideas are easy or simple to execute, but they should form the basis for where J.C. Penney needs to go in order to survive and thrive again.

    Bring the focus back to home goods

    There was a time not too long ago when J.C. Penney was considered the go-to store for home goods and furnishings. In 2006, home goods' sales accounted for 21% of J.C. Penney's total sales. But when the company took its focus away from home goods and onto clothing and fashion, its bottom line paid the price.

    In 2012, the home-goods category accounted for just 12% of sales. Worse, the company has lost significant market share to other middle-market retailers, like Target (NYSE: TGT) , Macy's (NYSE: M) and Kohl's (NYSE: KSS) as customers began looking elsewhere for fashionable merchandise at reasonable prices.

    J.C. Penney seems to at least understand the need to focus on the home-goods segment again, and appears to have a strategy to address this. A revamped home-goods section is scheduled to appear in about one half of J.C. Penney stores initially, and will feature big-name designers like Martha Stewart, Michael Graves and Jonathan Adler.

    Stewart's name has become virtually synonymous with home goods, Graves is a well-respected name in the world of design and Adler's presence as lead judge on the Bravo reality series Top Design should lend credibility and familiarity in wooing the younger customers into the store.

    It's a direction that provides a glimmer of hope, as J.C. Penney needs to get back to its bread and butter that helped put it on the map in the first place.

    Fix the J.C. Penney culture and get employees to buy back in

    One of the more remarkable things that has become news since Ron Johnson took over is how vitriolic the corporate culture at J.C. Penney has become. I pulled up a story just recently that's titled "Inside J.C. Penney: Widespread Fear, Anxiety, And Distrust of Ron Johnson and His New Management Team." And there are lots of other stories out there just like it.

    J.C. Penney employees all the way from the front lines to the executive offices have become vocal about how difficult it's become to work there. Allegations of rampant rumors, lack of communication and the constant fear of layoffs have left very little "buy in" from many company employees.

    The corporate culture issue has affected customers, as well. Shoppers have reported issues with their overall experience from a lack of greeters at the doors to long lines at the checkout to a lack of knowledgeable store employees.

    If your employees don't buy into the turnaround plan and openly resent the management team in place, it's going to be very difficult to turn things around.

    Decide on a pricing strategy and stick with it

    Johnson made the decision at the beginning of his tenure to go with a "lowest price all the time" strategy, and made the move to eliminate sales, coupons and gimmick-pricing. He did this in an attempt to let customers know they were getting the store's best price all the time and, theoretically, drive more consistent regular traffic to the stores. The strategy didn't work, as shoppers got confused by the pricing structure and were left feeling like they weren't getting adequate value.

    Johnson recently backtracked on that strategy, bringing back sales in selected merchandise like jewelry (labeling them as "events" instead of sales) and offering rewards coupons when a specific amount is spent inside the store.

    The decision has left both shoppers and analysts who follow the company confused as to what strategy J.C. Penney actually plans on following next.

    It's understandable that management would resume the coupon strategy because everybody knows that shoppers are suckers for deals and savings. People will buy lots of things that they don't need if they feel they're getting a deal on the merchandise. But "Johnson and company" need to decide on the retailer's pricing strategy and stick with it. The back-and-forth waffling is doing nothing but creating confusion and hurting the company's already-damaged reputation.

    Go after the younger shopper

    For better or worse, J.C. Penney has a reputation as an older person's store. Whereas retailers like Target and Kohl's have focused on trendier styles to draw in the younger customers (the ones that tend to spend more money in the store), J.C. Penney by and large has stuck with stodgier dated brands that tend to appeal to an older clientele.

    The move toward more recognizable designer names should help, but J.C. Penney needs to target the younger shopper hard. If a young person is going to shop for clothes, I'd venture a guess that J.C. Penney wouldn't even appear in the top-10 list of places to hit. That stereotype needs to change.

    Companies like Target and Kohl's have leadership positions in the middle-market retail space, while places like Nordstrom (NYSE: JWN) and Macy's are strong in the high-end space. J.C. Penney needs to figure out where it can fit in and where it's going to compete. Management needs to figure it out soon before the company becomes irrelevant in the retail world altogether.


    J.C. Penney executives are quickly running out of time to turn the company's fortunes and, truthfully, things might already be too far gone.

    The decision to try to pull Martha Stewart away from Macy's is proving to be a big mistake. Johnson felt like Macy's was just going to roll over and give up in the face of a fight and that hasn't been the case at all. Macy's has much deeper pockets than JCPenney and is correctly fighting to keep the Stewart relationship and away from its competitor. If reports are to be believed, Ullman is already looking to back out of the 10 year $200 million deal that Johnson signed with Stewart and presuming that issue is settled in the near future (which could include JCPenney paying Macy's legal fees) Macy's should be able to finally move forward.

    JCPenney might also be well served to adopt a Kohl's-like pricing strategy. Instead of just discounting merchandise on a regular basis (which Kohl's does very well), they also hand out Kohl's cash at the rate of $10 for every $50 spent. Additionally, they regularly send out customer coupons on "everything you buy" up to 30% off. At the checkout, the cashier makes a point of telling you exactly how much you saved on your visit and circling the number on your receipt. What better way to drive home the point of customers receiving value? It's something that JCPenney management could learn from.

    I don't think that any of the suggestions above would be a magic elixir that will fix all of its problems but I do believe that these are logical and attainable goals that will lead J.C. Penney back down the road of relevancy.

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

    Tags: JCP, JCPenney, Retail
    Apr 25 10:12 AM | Link | 1 Comment
  • College Prepaid Tuition Plans: Not Nearly As Good As Advertised

    As college tuition rates continue to rise at a rate far above the current rate of inflation, many parents of prospective students are facing increased difficulty in figuring out a way to pay for it. Sure, you can always take out a big fat loan but graduating from college saddled with tens of thousands of dollars in debt is not quite the ideal solution either.

    As another tool to help families save, many states began offering prepaid college tuition plans. The premise was very simple. If you want to avoid getting stung by the continuing inflation of tuition costs, you can buy prepaid tuition credits that essentially allow you to lock in future tuition at today's prices. Sounds like a pretty good deal, right? On the surface, yes. But, like an onion, start peeling back the layers and it starts to stink.

    The way that the typical prepaid tuition plan works is pretty straightforward. You pay a set amount today - potentially years in advance of when you'll actually need it - in exchange for the guarantee that your tuition will be covered at a later date. One of the big selling points of the prepaid plan is that it takes a lot of the guesswork out of saving for college. You don't need to necessarily worry about if inflation will cause tuition costs to spiral out of control because you're able to lock in those costs today.

    But what you get with the prepaid plan isn't always what is advertised.

    State governments like to publicize the fact that you can lock in tuition at today's rates with a prepaid tuition plan. But the "rate" that they're referring to is NOT the current going rate of tuition at a typical four-year university. It's the rate that the plan will charge to lock in future tuition credit. And those two rates can be very different from one other.

    Take the Florida Prepaid Plan for example. In the past, Florida charged a tuition rate that was similar to that of a current four-year public university. That was back when tuition was rising at a more reasonable rate and the state felt that it could earn a return on the plan's assets that could keep up. Now that tuition is rising at rates far above the rate of inflation, the state allows the plan to charge what it calls a "tuition differential". In reality, that's just a fancy way of saying that now they can charge you more than the current tuition rate.

    And Florida isn't the only state doing this. Programs in Michigan, Illinois and Nevada also allow savers to be charged these premium prices. In some cases, the rate these programs are charging to lock in future tuition is as much as double that of current prices. You may think that you're avoiding inflation by investing in one of these programs but in many cases you're just locking in a very inflated rate. In some cases, the rate is so inflated that it takes much of the appeal of the program away.

    Despite the potentially bloated costs of participating in prepaid tuition programs, many investors find that the peace of mind of knowing that your child's future tuition is guaranteed still makes the programs worthwhile. Unfortunately for them, the lackluster economy and rising government deficits have put many of those guarantees in jeopardy.

    A number of states have decided to shut down their prepaid tuition programs altogether citing spiraling costs and the inability to keep these programs fully funded. Of the programs that have survived, some no longer offer guarantees.

    The Florida plan stipulates, according to its website, that it is "financially guaranteed by the State of Florida". Similarly, plans in Washington and Mississippi continue to be backed by the "full faith and credit of the state".

    Programs in Michigan, Illinois and Pennsylvania though are only backed by the plan's assets. That means if the assets within the plan can't keep up with the promises made by the plan, the guarantee that your future tuition will be covered may go away.

    For example, it could mean that the plan will only guarantee 80% of tuition. Alabama's plan already had to make such concessions earlier this year. The Kentucky plan is becoming significantly underfunded meaning changes could be in the offing there too. The financial viability of many of these programs is in question and that could end up putting your investment at risk.

    You can start to see why some prepaid tuition plans are not fit for your portfolio. These plans were created to help lock in today's tuition costs for future use but if some of the states are charging rates that essentially bake in the cost of inflation anyway then where's the real value? If you invest your money in a prepaid plan under the notion that you're guaranteeing future tuition credits and that plan ends up dropping the guarantee or shuttering its doors altogether then how is that helping you get ahead?

    529 plans and Coverdell savings accounts seem to be more reliable alternatives. If you do choose to invest in a prepaid tuition plan, look at the plan's financial status and what types of guarantees they're able to maintain. There are still some good deals out there. But if you end up investing in a plan that is unable to deliver what was promised to you it'll end up doing more harm than good.

    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.

    Tags: long-ideas
    Oct 29 2:45 PM | Link | Comment!
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