J.C. Penney Company Inc. Turnaround Fails to Impress Wall Street

Ever since J.C. Penney's turnaround began 18 months ago, analysts have been skeptical of its ability to effect the necessary changes, even though the old-line retailer continuously managed to surprise Wall Street with the strength of its recovery.

Now it seems the retailer has given the skeptics the ammunition they were looking for to shoot down its efforts, and Penney's stock has stumbled badly.

Wearing a dunce cap over back-to-school sales
The retailer reported September sales were softer than expected and updated its guidance to say comps are expected to come in the low single-digit range compared to the prior forecast of mid-single digits.

It said a difficult retail environment and weaker sales of clearance merchandise combined with fewer people visiting its stores -- and those who did weren't buying merchandise -- its forecast fell apart.

Considering it had led everyone to believe the back-to-school season was off to a strong start with sales that would roll right through the month, it's understandable why eyebrows were raised -- and investors were hitting the sell button.

Investing most where growth is biggest
To keep women customers coming back, Penney plans on remodeling its handbags and intimates departments while dedicating an extra 30% more floor space for shoes. At the same time, men's footwear will get its own department.

Has the department store been going to hell in a handbag from not devoting enough space to handbags? Photo: J.C. Penney Analyst Day presentation Oct. 8, 2014

At the same time, the home department, which was perhaps the most affected division hurt by the changes former CEO Ron Johnson made, will undergo major new investment.

According to Penney, home department suffered:

  • Largest sales decline
  • Largest market share decline
  • Largest sales dollar per square foot decline
  • Largest drop in .com sales 

Of the $2.55 billion in estimated sales growth over the next three years -- an additional $1 billion can be obtained through market share gains -- the retailer sees some 30% of it coming from home goods, or $750 million.

And it's going to need a traffic cop
Although conversion is only up 1% through the first half of the year -- conversion measures how many of its customers coming into a store end up buying something while they're there -- sales were up 21%, traffic was up 10%, order value is up 10%, and units per transaction are up 8%.

It also introduced a new Apple iPhone app (an Android version will be available next year) and a new mobile site. Penney admits it largely squandered the opportunity on mobile, and has work to do catching up, but it is all part of the new focus, one which it believes is an $800 million sales growth opportunity.

Mobile is expected to outgrow desktop and mobile traffic -- combined! -- by the end of 2014. Photo: J.C. Penney Analyst Day presentation Oct. 8, 2014

From 2012 until now, desktop traffic has dropped from 72% to 52%; tablets, 13% to 16%; but mobile has gone from 15% to 32%. By the end of this year, it expects mobile will outpace desktop and tablet combined.

Across the industry, though, mobile has the worst conversion of all three devices.

History repeats itself
Last year the back-to-school season was a make-or-break period for the retailer, with many on Wall St. thinking it was ready to go under.

It battled back and surprised the markets, and though the stock has been on a roller-coaster ride the entire time, its financial condition is markedly better than when it began a year-and-a-half ago.

While it has reeled in some of the headier aspects of its prior guidance, it's still expecting to be free cash flow positive by the end of the year and it affirmed the balance of its guidance for the quarter and full year. Of course, Penney hasn't turned a profit in three years, but, hey, one step at a time.

More surprises to come
Still it remains particularly concerning to analysts that Penney isn't closing more stores than it's apparently planning to, which it feels is about the right size.

Because it's still in a fragile financial condition, it's still midstream of a turnaround, and it's experiencing softer than expected sales, Wall Street was looking for more dramatic changes.

J.C. Penney has surprised them before, and it's announcement that it's hiring former Home Depot executive Marvin Ellison to take over CEO responsibilities from Ullman seems to have done it again. Come year end, the retailer may have to pull a rabbit out of the hat once more. 


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The article J.C. Penney Company Inc. Turnaround Fails to Impress Wall Street originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple and Home Depot. The Motley Fool owns shares of Apple. 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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