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).
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Its really about quality goods at sale prices,period.
Get real jc penny
besides, jcp doesn't know which way to go. it removed its furniture line years ago. now its trying to become a discount store. pretty soon, its stock iwill be nothing more than penny stock.
jcp should just close its doors. no one will miss them.
JC Penney's is really isolating it's main consumer base, by getting rid of coupons and then including homos in their ads. Ick. Time to shop elsewhere.
DOES MANAGEMENT EVER LISTEN RON JOHNSON IN PARTICULAR?
I had to order a pair of shoes to get the correct size. When they came in I was told via a phone call that I could go to any register to pick them up. What happened to the catalog pick-up counter? I noticed that it was closed. So I went to a customer service register and waited in line. When it was my turn I stated why I was there. A manager had to be called to get my order. But that manager was on the phone. Had to wait for her to get to the register, take my receipt, go to where the ordered items were kept and then return to the register. This is the new J.C. Penny?
I can understand the new concept of not mailing out all the coupons and magazine advertisements to cut costs but I still get this large book with advertisements of what's on sale. I also noticed in the last few months that the stores seem to have less customers in them.
I do not like the changes at JCP stores. They have fewer brands and sale items. I find it harder to find my favorite brands, also. And the money they are spending on advertising in their monthly mailout is a huge waste. I look through it. It's professionally produced and looks good, but I give it a quick glance and throw it in the trash. It doesn't get my shopping juices running, to be sure. Hope things get back to more of what we were used to or the stores will suffer.
i love the prices there. i think they are fair. i think the daily onslaught of coupons in the mail were just a waste of paper. if you go in there, there's still tons of things on sale for cheap and you don't even need a coupon. the concept was a great idea. they really did have a lower price on everything, everyday, but people just can't seem to realize that. i don't know why...
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