2017-04-20 / Business News

Lowly JCPenney stock is risky, but it’s a risk that may pay off

MONEY & INVESTING
eric BRETAN

Mention the department store JCPenney to anyone, and I think the reaction will be dependant on the person’s age. Someone older than 50 may remember ordering items from its once-popular mail order catalogs. A person born in the 1970s or ’80s may recall his parents forcing him to a store to try on “Back to School” clothing that he didn’t want to wear. Bring up JCPenney to a Millennial and she may not know what you are talking about, never having stepped foot into a store.

Needless to say, the JCPenney brand is facing hard times and its stock price is as reflective of this struggle. Just 10 years ago, the stock price was over $85 per share. It is now below $ Of es 6. course, the entire retail industry is currently under strain, but JCPenney seems to be the poster child of a retail giant that has been brought to its knees. So what has caused this store to falter and can it ever regain its luster?

At its peak in the 1970s, JCPenney had over 2,000 stores across the U.S. and sold everything from clothing to appliances to car parts to shotguns and even groceries and pharmaceutical drugs. But in the 1980s, the department store decided to shed most of these businesses and focus mainly on apparel. This decision did not pan out for the company, as internet retailers Walmart, Target, Amazon and fast fashion retailers stole customers and market share.

In 2011, JCPenney hired retailer superstar

Ron Johnson to lead the company to greatness. Mr. Johnson formerly led Target and Apple stores to success and shareholders couldn’t wait to see what he could do at struggling JCPenney. The new CEO dramatically changed how the retailer sold its products. He reasoned that consumers were tired of clipping coupons and waiting for big “sales” to buy items. He believed that people just wanted quality items at a fair price and that is how JCPenney started to sell its clothing.

Unfortunately, people did not respond well to Mr. Johnson’s new sales strategy. First, it appears that people like the “game” of clipping coupons and shopping at sales. They like to feel like they are getting a “bargain” despite the fact that the same coupons and sales are available to everyone.

And without the aggressive promotions, people couldn’t find a reason to shop at JCPenney. There were better pricing of name branded items online or at larger stores like Walmart. And JCPenney private label brands were deemed not as fashionable as similar brands at places like Target or fast fashion retailers.

As a result, sales at JCPenney plummeted. Mr. Johnson was fired in 2013. In the past few years, the company has returned to its practice of marking up items and then heavily discounting them via coupons and sales. It has also committed to closing over 100 underperforming stores and cutting its workforce.

So is JCPenney dead in the water with no hope of rescue? I wouldn’t write it off quite yet. First, the company has been focusing on improving its balance sheet by paying off debt and cutting expenses. More importantly, the company has a plan in place to improve sales by pivoting away from its almost sole focus on apparel. For example, it has a Sephora cosmetics “store within a store” in 590 locations and plans to open 70 more in the upcoming year. Cosmetics are a high margin business that drive consumers into a store.

JCPenney also recently announced that it will compete directly with Home Depot and Sears by selling appliances in its stores once again. These are products that consumers typically do not buy online and also can drive foot traffic.

Finally, the company has started a Home Service division within its stores where it is offering bathroom remodeling, blind installation, home water solutions, smart home technology, and home heating/cooling. Again, these are services that you cannot buy on Amazon and are something that can distinguish JCPenney from competitors like Walmart.

And it looks like these strategies are beginning to pay off. Earlier this month, the company announced that it was delaying the closing of 138 of its stores because sales and foot traffic at these locations has been considerably higher than management anticipated after the store closings were announced.

But despite these positive changes, JCPenney stock remains at historical low prices. And from a valuation basis, the stock looks as discounted as a ski parka in July with its price to sales ratio at half that of many of its competitors. So much bad news is already priced into the stock that if one of its growth initiatives pays off, you could see a significant bounce in the stock. Clearly, JCP is a very risky stock right now but the risks just may be worth the potential reward. ¦

— Eric Bretan, the co- owner of Rick’s Estate & Jewelry Buyers in Punta Gorda, was a senior derivatives marketer and investment banker for more than 15 years at several global banks. ¦

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