Why J.C. Penney Will Never Be Great Again

JC PenneyThis should be a big month for J.C. Penney (JCP).

On Wednesday, the department store chain officially rolled out its "Fair and Square" pricing strategy. Instead of frequent sales and perpetual markdowns on aging inventory, J.C. Penney is introducing everyday low pricing. No one is sure if pricing confusion kept shoppers away from the retailer, but reliably low price tags on fashionable duds sounds like a winning strategy on paper.

If it sounds a lot like Target's (TGT) "cheap chic" way of thinking, perhaps it's because new CEO Ron Johnson spent the 1990s as an executive at the country's second-largest discounter.

But Johnson's real claim to fame is what he did on this side of the millennium.

Comparing Apples to Orange Stockings

Johnson arrived at Apple (AAPL) in time to pioneer the tech giant's ridiculously successful foray into retail. The Apple store empire grew into a 300-unit behemoth, raking in $15 billion in annual revenue under his watch. He left Apple to head up J.C. Penney in November.

He's a great catch for J.C. Penney, but will it be enough to turn the chain's fortunes around? The market seems to think so. Shares have nearly doubled since bottoming out back in August. Most of those gains have come since Johnson's arrival.

It's only helped Johnson's cause when he claimed that the chain's makeover -- in both pricing and layout -- may save the debt-saddled company $900 million over the next two years. He also issued a robust fiscal outlook, but even he can't know if all of his changes will work out.

For starters, this isn't Apple. This isn't the only place in the mall to buy a Macbook or get a "genius" to mend your ailing iPhone. (Better or cheaper clothing options are likely a few stores away.) There's a reason why Apple is any mall's top seller per square foot, and it has more to do with Apple's brand than how the bright stores are laid out.

Johnson can't just install the Green Bay Packers offense in the Cleveland Browns team and expect success. It doesn't work that way. Apparel retailing is a commodity.

There's also a big different between what cash-rich Apple can do and the flexibility available to J.C. Penney with its $3 billion in debt.

A Penney for Your Thoughts

The Apple-ization of J.C. Penney is also susceptible to jabs.

Folks have generally been bashing the sparse "jcp" logo that was officially introduced on Wednesday for its simplicity. And by next year the retailer's stores will be carved out into dozens of brand-specific areas with a "town square" center for services. This may very well work for Apple with only a handful of product categories, but it may be confusing for someone trying to find a particular brand among 80-100 brand areas in the "Main Street" that Johnson envisions.

If it flops, Johnson's toast. If it works, rivals will quickly embrace the new format. In other words, it's a lose-lose less scenario.

Even the every day low pricing mantra may prove to be confusing. J.C. Penney still plans unique month-long promotions anchored by a chunky 96-page catalog that will be mailed out. The "everyday" low prices deserve asterisks because extra markdowns may take place on the first and third Friday of the month to move stale merchandise. In the end, shoppers will still be navigating through a myriad of distinctive Every Day, Month-Long Value, and Best Price colored tags.

Simplicity shouldn't have to be this confusing.

Pin the Tail on the Retailer

Right now, the love affair is still strong between the meandering department store chain and the investing community.

Johnson hasn't failed.

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Optimists are counting the incremental shoppers, without considering that current customers might take their plastic elsewhere. They're warming up to the low prices that have helped Target, TJX (TJX), and Kohl's (KSS) through these bargain-hungry years, but perhaps they're not aware that the mall rents where J.C. Penney's lives are higher than what the strip-mall anchors have to shell out.

And if J.C. Penney is truly offering lower prices, are we looking at lower margins or a lower quality of merchandise? Choose one.

The stock's heady run in recent months has discounted the perfect execution of Johnson's turnaround strategy. Where's the upside? J.C. Penney is trading for roughly 20 times this new fiscal year's target. Kohl's and Target fetch multiples of 10 and 12, respectively. Even Johnson's former home -- growth demon Apple -- is trading for about half of J.C. Penney's forward earnings multiple.

J.C. Penney's stock is too expensive for any investor that can appreciate "Every Day" low prices. The reinvention process is always harder than it seems.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple.

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