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Timothy Perdian
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Investing in stocks or twenty years, undergraduate degrees in Englis and Genetics from the University of Wisconsin. M.A. in Creative writing from University of Wisconsin-Milwaukee. And a Doctor of Chiropractic degree from NCC. Post graduate Certificates in Worker's Compensation (California),... More
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  • J. C. Penney Struggles As Ron Johnson Era Ends After Failure To Turn A Profit 0 comments
    Apr 16, 2013 2:15 PM | about stocks: AAPL, COH, COST, KORS, LULU, TIF, TRLG, URBN, WMT, JCP

    Ron Johnson, J. C. Penney's (NYSE:JCP) former CEO, was hailed as a savior when he was brought over from Apple's (NASDAQ:AAPL) retail division to head J. C. Penney. He was expected to turn the ho hum retailer into a special place to shop. Like Montgomery Wards and Sears and Roebucks, J. C. Penney was a house hold name in the 50's and 60's. America was in full bloom, the working class had money and needed stuff. All three retailers catered to middle America. The Archie Bunkers of the day could be found shopping for socks, ladders and shirts, Edith for clothes for her kids-rarely for herself. Unfortunately the big box chains and the internet have sucked sales away from these stores. Their customer base has shrunk and most of the working middle class are now the working poor. J. C. Penney's shoppers have really been a vanishing demographic growing both poorer and smaller.

    Ron Johnson was suppose to magically turn this trend around. Apple store were destinations, places people like to go. If he could do the same for Penney's, the once proud brand could reemerge as a marketing giant. Johnson was fired and replaced by J. C. Penney's Myrun Ullman. Ullman was the CEO prior to Johnson's move from Apple.

    But was this asking the impossible? Looking at successful clothes/accessory retailers like Lulemons (NASDAQ:LULU), Urban Outfitters (NASDAQ:URBN), Anthropologie, Coach (NYSE:COH), Tiffany and Co. (NYSE:TIF), Michael Kors (NYSE:KORS), none of them are role models for J. C. Penney. All of them appeal to targeted demographics. J. C. Penney has more in common with Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) than it does with Coach or True Religion (NASDAQ:TRLG).

    Johnson lowered prices and increased the clutter of J. C. Penney. You could hardly turn around in the store without running into a rack of shirts or pants. Costco and Wal-Mart use their leverage to force wholesalers to sell them goods cheaply. J. C. Penney probably doesn't have the volume to compete with the big box retailers. As a chiropractor I sold low back braces. The price I paid wholesale for the braces was more than Wal-Mart's retail price. It is hard to compete when one store can get sell the same item for lower prices than your store can buy them wholesale. That in a nutshell is what J. C. Penney has to overcome. The only way to make to make J. C. Penney a viable competitor was to either specialize in items where they could sell the clothes at higher margin than Wal-Mart or to make shopping at J. C. Penney a positive delightful experience that would make up for the slightly higher costs.

    This could have been done by turning J. C. Penney into a working man's Louis Vuitton type collection of brands. Selling clothes and accessories by various designers at prices comparable to the generic big boxes by creating stores within the store might have worked. If Ron Johnson could have changed the mix at J. C. Penney so that higher margin designer items were sold along with J. C. Penney branded necessities and made the store an inviting and comfortable place to shop he might have been able to create a niche between the gross and ugly big box stores and the elegant but costly Lulemons, Coach and Anthropologie lines. However it would have take a retail genius to do so. Given that it is hard to see how J. C. Penney can survive let alone grow in today's retail world. Total sales were down more than 28% last year. The company is trying to monetize real estate assets by selling them and leasing them back. That is never a good sign. Currently about one third of the float is sold short and unless the economy improves, Mr. Ullman comes up with some great ideas and shoppers return to the malls in droves JCP is unlikely to see a higher price for its stock until it shows a profit and earnings growth. The stock is dangerous to hold here and if you are long hedging with a few puts might be prudent.

    Unfortunately Mr. Johnson was not able to work his Apple magic at J. C. Penney. He is not alone.

    Apple exectuives have had trouble taking their talents to other companies. Ron Johnson was obviously not the person to turn around the venerable J. C. Penney stores. The reason for this may not be that complicated. At Apple executives were valued for their ability to implement Steve Job's concepts and to keep him from going to far outside the box. At their new jobs the nascent CEOs were in a position where they were expected to push the envelope. In other words the new CEO's were hired to do the opposite of what they had been rewarded for doing at Apple. Given that the failure of most Apple transfers is not so mysterious.

    Disclosure: I am long AAPL. 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.

    Themes: short-ideas Stocks: AAPL, COH, COST, KORS, LULU, TIF, TRLG, URBN, WMT, JCP
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