6/5/2012 6:29 PM ET|
Is JC Penney the next Sears?
After a dismal first quarter, the iconic retailer is backing off its low price, no discount recovery plan. Can the turnaround work? And if so, when should investors buy in?
Memo to Wall Street: Out here on Main Street, we love our sales.
The hedge-fund managers now calling the shots at J.C. Penney (JCP) learned this the hard way, when sales totals at the old-line retailer dropped a painful 20% in the first quarter -- largely because they yanked coupons and most sales away from shoppers.
The stock tanked, and last week Penney started backtracking. It plans to add more sales, though, so far, not coupons.
The wizards behind Penney's ongoing makeover may wise up over time. But this is a terrible start.
And it means you have to wonder if J.C. Penney -- which dates back to 1902, when James Cash Penney opened his first store in Wyoming -- is doomed to follow the recent path of another iconic retailer.
That would be Sears, (SHLD) which is being run into the ground by hedge-fund manager Eddie Lampert of ESL Investments (see "Why Sears in on its last legs"). Sears, too, had seen better days before Lampert took over. But its history under Lampert has been one of failed plans and neglect, customer defections and store closings.
So will Penney's follow the same downward grind, or will the overhaul work?
As the turnaround turns
To some investors, Penney's may look tempting right now. The stock is down 40% this year from January highs above $43 to under $26. It remains a huge retail presence with a brand everyone knows and more than 1,000 stores nationwide.
And Penney management remains positive. Even as they announced dismal earnings, the Masters of the Universe in charge at Penney said their makeover was ahead of schedule.
Yet in the first quarter, store traffic fell 10% as shoppers thumbed their noses at all the recent improvements. If this is success, what's failure?
Despite the numbers, Bill Ackman, of the Pershing Square Capital hedge fund, which has a big enough stake to be on the board and call the shots, has maintained publicly that this could be a "10-bagger." That's a tenfold profit on the stock -- an enticing prediction.
For a deeper look into the J.C. Penney overhaul, I consulted two veteran retail-sector experts. One suggested a root problem: Hedge-fund masters just don't get regular shoppers or retailing. "Being wealthy doesn't necessarily link to being smart. This thing is going to be a bigger train wreck than Sears," said this former CEO at a major national retail chain, who now teaches at a top business school.
My own verdict: There's more bad news to come, and J.C. Penney may well be run into the ground just like Sears, unless the people in charge wise up in time. The stock might be a gamble worth taking, but only at an even lower price.
Here are five key questions -- with my answers -- about the road ahead for this American icon.
1. Are the people in charge all they're cracked up to be?
Warren Buffett famously says a key ingredient in a winning investment is top-rate management. Is that what we have here? The J.C. Penney bulls certainly want you to think so. Slide decks explaining the overhaul -- from Ackman and the company itself -- are laced with references to Apple (AAPL), photos of Apple stores and products, and even Steve Jobs.
This, of course, is meant to suggest that J.C. Penney CEO Don Johnson has a special retail management magic. He was in charge of setting up the highly successful Apple retail stores. But how much does Apple's success with stores really tell us about how successful Johnson will be at J.C. Penney?
Not one bit.
"If Apple products were sold from homeless shelters, there would still be lines outside the homeless shelters," says veteran retail-sector analyst Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm. Johnson's success at Apple was all about the popularity of Apple products. "It has no relevance to J.C. Penney at all," says Davidowitz.
Likewise, Johnson's experience at Target during the 1990s -- another talking point used by Penney bulls -- may not be a great indicator of his skills. "Johnson was one of many executives at Target," says Davidowitz.
One positive here: Johnson spent $50 million to buy the rights to purchase 7.3 million Penney shares at $29.92 after six years. That shows conviction.
As for Ackman, one of the hedge-fund bosses in command here, two previous attempts to "fix" retailers did not go so well. One, Borders Group, went bankrupt. And he had big plans to overhaul Target's (TGT) real-estate holdings a few years ago to push the stock up. That didn't work out, either.
Stocks mentioned in this article include: Talbots (TLB).
VIDEO ON MSN MONEY
June 5, 2012
(Gomorrah International News)
It’s official. Controversial JCPenney spokesman Ellen Degeneres has been fired. CEO Ron Johnson made the decision over the weekend. Johnson had in the past declined to comment on Degeneres’ role in the sharp decline of the retailer’s stock price.
In her place, Johnson has decided to fill the position with a rotating cast of celebrities. “I have decided to replace Ellen with John Bobbitt, Nadya Suleman (better known as the Octomom), Chaz Bono, Al Sharpton and adult film actor Ron Jeremy.” Johnson added, “I do not believe we have alienated enough of our customer base with Ellen’s hiring. Hopefully my new choices for JCP spokespersons will finish the job.”
In related news, Johnson has announced the company’s new relationship with the Gay Games, an Olympics-style sporting competition. “We are especially looking forward to the new events at the Gay Games such as Pole Vault Sitting, the Bathroom Stall Relay and a variation of the Three Legged Race,” Johnson said.
“I’m not quite sure that the shareholders or longtime customers will agree with my new changes,” a smirking Johnson said, “but as far as I’m concerned, they can all go to hell.”
The CEO used the wrong strategy for the JC Penney customer
The Apple customer and the JC Penney customer are two different people. When a customer enters an Apple store their primary concern is not price, but capability; they are prepared to spend $400-600 on an IPAD and well over $1k for a Mac..
However, the JC Penney customer is looking for quality merchandise at the lowest price possible. In the age of big box retailers and "power centers" it has become increasingly difficult for malls and full line department stores to attract customers; moreover, JC Penney's decision to end sale and coupons promotions pushed more customers away from the mall.
JC Penney is correct in revamping it's image into a modern retailer, but if left unchanged, its pricing strategy will certainly cause the demise of the iconic chain.
When I finally figured out Penney's confusing ads about their "no sales" policy, I waited. It didn't seem like a very good idea, and has proven to be a bust.
Once they announced they were going back to understandable pricing, I was set to shop.
Now, because of their stance on same-sex couples in their advertising, I'm not going to shop there.
1) I don't like having my face rubbed into a lifestyle I don't agree with.
2) I'm tired of being labeled a bigot if I don't agree with the latest thing on the bandwagon ..
I do not hate gays, but I don't agree with or support their lifestyle. I am entitled to my opinion without being labeled a bigot.
If JC Penny wants to do something new; try advertising made in the USA. People are sick of China owning the US and the US customer sending our money out of the country.
Penny's new tactic is stupid. I stopped shopping there. People want sales and coupons. Look at Kohl's.
I hope JC Penney makes it. I have been shopping there a lot more lately. There clothes are nicer than they used to be. I also love the prices in their baby section. I would suggest they lower the price on the $60.00 dresses that should be 35-40 at the most. They are to plain or the fabric to slinky to pay $60.00.
What a shame that Ron Johnson took such a sucessful company and ran it into the dirt.
"Proof? look at the stock"
Banking the customers would fall for "Fair & Square" Where subjested retail is "X" dollars and normally you would of gotten 25% sale price off and then your coupon. It is not that way any more. The products are cheap, your dollar shrunk.
Now you can't find any one to help you because they laid off hundreds of season employees to save having to pay out benefits. Catalog desk is no more. This company no longer cares about the customer or it's employees.
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