Have Some Faith in J.C. Penney

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The verdict is clear -- people just aren't shopping at J.C. Penney (NYS: JCP) anymore. In fact, Penney's first-quarter earnings have been a source of ridicule with Twitter serving as a popular medium. Our very own Fool Rick Munarriz chipped in, saying, "The silver lining in J.C. Penney's awful report is that Sears has someone it can laugh at now."

The market reacted quickly as shares plummeted 20% during intraday trading, the biggest fall since July 1980. So what exactly triggered the downfall?

J.C. Penney's sales fell by 20.1%, as it struggled to cope with a staggering 18.9% decline in same-store sales, an important financial metric for retailers. This led to Penney's posting a loss of $0.25 per share. To make matters worse, the retailer also announced that it would discontinue its $0.20 per share quarterly dividend. Do we need any more reasons? I think not.


The arrival of Apple's former retail chief, Ron Johnson, to Penney's initiated a transformation at the struggling retailer. His appointment was met with much optimism as he was expected to bring in some of the Apple-esque retail magic to Penney's stores. But now, it's evident that investors are not impressed.  

One of Johnson's first moves was doing away with Penney's old slash-and-burn pricing strategy, replacing it with a three-tiered pricing system which involved everyday low prices, sales on select products every month, and clearance sales on the first and third Fridays of every month. It seems shoppers haven't been able to adjust to this new strategy too well.

Not only has the strategy backfired, it's actually benefited rival retailers who've managed to woo away a sizable section of shoppers. In fact, peer Macy's (NYS: M) made it clear when it came out with its earnings recently that it was benefiting from Penney's "non-promotional price streamlining" -- an indication that the plan wasn't working well and also a behind-the-scenes reason as to why sales possibly fell. Johnson said, "Sales and profitability have been tougher than anticipated" this quarter and that Penney's had "work to do to educate the customer on our pricing strategy and to drive more traffic to our stores."

But give Johnson a break, guys. Transformation isn't easy. He's trying to change the business model of the company; he's done away with the retailer's outlet business and undertaken a huge store transformation plan, among other things. And as we all know, the old approach was clearly hurting the retailer more than anything else.

I was very excited by Penney's new store concept, even though I had warned that reinventing was going to be a risky strategy. If you ask me, this store is not for the masses and is possibly meant to target mid- to upscale clients. My assumption is based on the fact that stores are designed to resemble mini towns, housing a wide array of brands ranging from Martha Stewart to Nanette Lepore.

I still find Penney's strategy exciting though and recommend playing it long on this stock. And now since the stock has fallen, down more than 23% this year, this may be a good time to get your hands on Penney's. Transformation isn't easy, like I've said, so Johnson needs time to work out his Apple magic.  

Penney's had a poor run this quarter and may not look like the most compelling stock pick at the moment, but don't worry as we have some other pretty compelling ones for you. Learn more in our free report, "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail."

At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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