An American Icon Reinvents Itself

I think you'd better sit down for this one, or at least hold on to the nearest piece of furniture... J.C. Penney (NYS: JCP) is actually innovating!

After decades of J.C. Penney being synonymous with deep discounts, CEO Ron Johnson, whom you may recall is the former head of retail operations at Apple, yesterday announced sweeping reforms of his new company's pricing and merchandising strategy, which will be phased in over the next four years.

For starters, Penney is going to tackle its weakening margin issue by introducing a much simpler pricing structure. As someone who worked in retail for nearly a decade, I can tell you from firsthand experience that price consistency is one of the keys to keeping your customers loyal. Rather than focusing on having perpetual deep-discount sales, Penney is planning on using an everyday low value price. This doesn't mean that it's doing away with sales altogether, because there will be clearance-styled markdowns on some items two days a month, but the whole goal here is simplicity in pricing.

Simplicity is definitely needed, since the average discount at Penney has shot up from 38% to 60% in just the past 10 years. In fact, according to Mr. Johnson, 72% of Penney's $17.8 billion in sales last year came from items that were discounted at least 50%. That's the reason that Penney drastically lowered its EPS guidance three weeks ago and the primary reason that rivals Macy's (NYS: M) and Kohl's (NYS: KSS) have been eating J.C. Penney for lunch all these years.

The other aspect of Mr. Johnson's turnaround involves the way merchandise is displayed. Taking a page out of Macy's book, Penney will begin organizing its store by brands -- almost creating a store within a store. By doing this, Penney can remove underperforming brands and hopefully create the brand-image association it has been trying to obtain with consumers for years. Macy's did nearly the same exact thing a few years back. It pared down the merchandise in its aisles and focused on brand reorganization. Needless to say, the stock has rallied significantly since then.

To deal with the obvious confusion Penney's overhaul may cause consumers, the company is planning to spend $80 million each month on advertising to help customers adjust to the new Penney.

What this really comes down to now is whether or not Penney is worth waiting around for when you have companies like Macy's and Kohl's trading at just 11 and 10 times forward earnings, respectively, while Penney's trades significantly higher at 42.

Many investors will be quick to dismiss Penney, and with good reason -- it has been a perpetual underperformer for years. But remember that Mr. Johnson was the primary genius behind the Apple store concept... and the last time I checked, they were doing pretty well!

Mr. Johnson also understands that his core customer needs easily recognizable brand names, which is why his company purchased a 16.6% stake in Martha Stewart Living Omnimedia (NYS: MSO) last month. The 10-year pact will allow it to compete head-to-head with Macy's, which also sells Martha Stewart products.

Finally, don't forget that before he was overseeing the opening of 300-plus Apple stores, Mr. Johnson was the senior merchandising executive at Target (NYS: TGT) for 15 years. Under his leadership, Target was able to bring higher-end designers to consumers for department-store prices. To top this off, Penney lured former Target executive vice president Michael Francis to serve as president in October. While Johnson was able to bring Target brand names it had never had before, it was Francis' marketing that made Target a fun place to shop. With these two reunited, it's quite possible J.C. Penney could go through a similar transformation.

What's your take on this department-store dinosaur? Is Penney a relic or does it have turnaround written in the cards? Share your thoughts in the comments section below and consider adding J.C. Penney to your free and personalized watchlist so you can keep up with the latest developments with the company.

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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He prefers to shop at stores that don't run sales. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of, as well as creating a bull call spread position in, Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always the best price: free!

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