How J.C. Penney Can Avoid Bankruptcy

Not too long ago, J.C. Penney , down 62% so far this year, was one of the strongest American department store chains on the market. Founded in 1902, J.C. Penney survived the Panic of 1907, the Great Depression in the 30's, and even the post-Lehman global recession of 2009 by targeting the middle-class consumer.

However, J.C. Penney's old competitive advantages may have become weaknesses. After a severe sales decline caused by intense competition from higher-end merchants like Macy's  and lower-end merchants such as Wal-Mart , J.C. Penney is now very close to filing bankruptcy. Can the retailer turn things around?

JCP Chart

Source: YCharts

Planning the turnaround
In a fiercely competitive environment, J.C. Penney's big mistake was to stop changing. Customers' behavior changed considerably after the most recent economic crisis. In general, everybody became more price-sensitive, reliant on e-commerce sites, and keen on meaningful promotions. Specifically, J.C. Penney's main target, the middle-income sector, was and still is disproportionately affected by the long-term consequences of the Great Recession.

Higher-end merchant Macy's reacted to the challenging macroeconomic environment by offering increased value at lower price points. Macy's also improved its shopping experience considerably by investing in infrastructure, positioning of exclusive brands, development of mobile applications, social media and in-store technology -- for example, by placing tablets inside stores and expanding its wi-fi support.

More importantly, Macy's realized that in order to survive in the new macroeconomic environment, it had to create different brands for increasingly different consumers. Macy's kept using aggressive discounts on the one hand, but on the other it implemented a smart localization strategy to strengthen its Bloomingdale brand as a top-quality upscale chain. As a result, in the first quarter of 2013 the company managed to increase its revenue by 4.9%.

On the other hand, Wal-Mart, which built a strong reputation for having the lowest price for every product every day, reinforced its price strategy with aggressive price cuts. The company's gross margins were hurt, but it managed to deliver revenue growth in the 2% range. This is an admirable achievement for a company with more than $450 billion in annual revenue.

In February 2013, J.C. Penney adopted a pricing strategy similar to Wal-Mart when it decided to eliminate coupons and sales from its stores. Instead, it lowered prices permanently by 40%. Unfortunately, customers did not react favorably to the new pricing. Although J.C. Penney can learn a lot from the strategies implemented by Macy's and Wal-Mart, it will have to develop and implement its own survival plan.

J.C. Penney's new CEO Mike Ulman has a different turnaround plan. The new plan involves a mix of strategies: investing in e-commerce, implementing in-store inventories, strengthening some of its most popular brands, like Worthington and Stafford, improving its merchandising and promotional strategies sustainably, and innovating in-store experience.

Most of these changes have already started. For example, in the previous quarter the company started deploying 2,800 mobile carts in several stores. It implemented a viral "back to school" marketing campaign called "First Day Look" that emphasizes the importance of choosing the perfect ensemble for the first day at school. But, more importantly, the company reinstalled its traditional discount-based pricing. This move alone will help to recover some loyal customers.

Naturally, J.C. Penney's turnaround is a long journey full of uncertainty. The good news is that the company seems to have finally understood its problems, and it has the right executive team to fix its issues. For example, the company recently hired Saks Fifth Avenue CEO Stephen Sandove. Saks is a luxury retail chain with top-line growth problems as complex as those of J.C. Penney.

Final Foolish thoughts
After several failed attempts to fix its issues, J.C. Penney's management has developed a consistent turnaround plan. However, the company still has a long way to go to reach profitability. Short-term, the company will burn more cash. Considering that J.C. Penney's financial situation remains critical even after its recent $800 million capital raise, the \ risks involved should not be ignored.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

The article How J.C. Penney Can Avoid Bankruptcy originally appeared on

Adrian Campos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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