1 Company Going Above and Beyond

Updated

As individual investors, we're still living in the world of risk and reward. Sometimes, companies make smart moves and the risks pay off. Sometimes they fail spectacularly -- and sometimes, companies just get scared of taking risks. This year, a lot of retailers have opted to take the boring, risk-free road. And some, like J.C. Penney (NYS: JCP) , have been learning the lessons of taking too many risks, without having a clear plan in mind.

The sound of flailing
When J.C. Penney announced its first-quarter results back in May, and the stock subsequently dropped like fat Icarus, one of my investing buddies got very excited. "It's like free money," he shouted. "Only a small-minded simpleton would willingly miss out on this!" That's a bit of paraphrasing, but you get the gist. He really likes CEO Ron Johnson, and thought that his approach to retail had the potential to change the way department stores worked. To Johnson's credit, he hasn't given up on that dream.

While last quarter was also abysmal, with the same-store sales dropping 22% and revenue falling 23%, the company continues to press ahead with dramatic changes. Johnson's goal is to move J.C. Penney from a "sales all the time" store to a "good value" store. The first iteration of this involved getting rid of sales completely, and instead having three different value tiers for customers -- that didn't go so well. Now the company is focusing on shops within the stores.


The first rollout is a Levi's shop in J.C. Penney, which focuses on that brand only. Preliminary results have looked good, with sales of Levi's rising in stores which feature the shops. The next move from Johnson is to expand the number of shops in the store, with offerings from Arizona and Buffalo jeans coming soon.

For all of this vision, the effort still seems a bit like firing buckshot into the trees and hoping for a dead bird. For instance, in addition to the denim bar -- which is new industry slang for a table -- J.C. Penney is offering kids free back-to-school haircuts. There's some kind of vision in Johnson's head, but he's not making it easy for investors to understand what that vision looks like.

The security blanket stocks
For all of the running around that J.C. Penney is doing, it's not even keeping pace with the pack. Nordstrom (NYS: JWN) , Kohl's (NYS: KSS) , and Target (NYS: TGGT) have all just cruised through 2012, and they're miles ahead of J.C. Penney. All three have seen their stock rise this year, although only Target has outpaced the S&P 500. But none of the three has done much interesting. Target has announced a joint operation with Neiman Marcus for Christmas. Kohl's has just barely squeezed a gain out this year, though not doing as badly as people expected. Finally, Nordstrom has done everything expected of it, and it announced a plan to open 15 new Nordstrom Rack stores this year.

So in a way, the inaction that these companies have put on display is putting J.C. Penney's running around to shame. So far in 2012, Penney is down 36%. It certainly seems to make a case for doing what investors expect -- not trying anything new -- and just plugging along. After all, why take a risk when risks lead to failure?

The risk-reward balancing act
The reason to take a risk it is that sometimes the risk is well-calculated, and the move pays off like a faulty slot machine. Dillard's (NYS: DDS) has blown up this year -- and not in a "claim the insurance money" sort of way. The company has bounced back from its bankruptcy scare a few years back and has really cleaned up operations. Last quarter, revenue increased 3% to $1.5 billion. That's fine, but the real win for investors is in the bottom line.

Net income increased an incredible 76%, jumping up to $31 million. On top of that, the company has jumped into share buybacks with both feet recently, so earnings per share jumped even more dramatically, up 97%. This has all come off of a fairly small same-store-sales increase of 3% in the last quarter, so the dramatic jump the stock has seen so far this year may start to taper toward the end of the year. Even with that slowing, the company is clearly executing on its plan in a way that J.C. Penney hasn't been able to.

The bottom line
It can seem like J.C. Penney is getting punished for trying something new, but that's not really the case. J.C. Penney is suffering because it's doing something that people don't understand or want. That might change with the shop plan, but I can't see it making an impact big enough for the stock to recover to its earlier position. Dillard's is actually doing something. While it might not be setup for sales growth yet, it's making a material difference to shareholders and buying itself some breathing room for when it decides to change its customer face.

I've never been a Dillard's shopper, but I like what's going on behind the scenes. I'll be watching closely to see if that strong execution can be carried over to the front of the store. If it can, then Dillard's might very well make the Fool's next issue of "3 Stocks Wall Street's Too Rich to Notice." This free report focuses on smaller companies that are flying under the radar of the big guys and are perfect for the individual investor. Check all three out, and get your free copy today.

The article 1 Company Going Above and Beyond originally appeared on Fool.com.

Fool contributor Andrew Marder does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Dillard's. 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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