Tags: JC Penney | Turnaround | Retail | Sales

David N. Frazier: J.C. Penney Finally Showing Signs of a Potential Turnaround After Replacing the Company's CEO

By    |   Friday, 14 Mar 2014 09:45 AM

After replacing its prior CEO, Ron Johnson, on April 8, 2013, J.C. Penney (JCP) is finally showing signs of a potential turnaround.

For example, the Plano, Texas-based company announced on Feb. 4 that during the 2013 Christmas shopping season its same-store sales rose 3.1 percent, as compared to the same period during 2012.

For its fiscal quarter ended Feb. 1, 2014, the company reported that its same-store sales rose by 2.0 percent. That’s the first time since the second quarter of 2011 that J.C. Penney has generated a positive quarterly sales result. In comparison, the company’s same-store sales declined 31.7 percent during the same quarter a year ago.

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Meanwhile, the company’s online sales rose a whopping a 26.3 percent for the quarter ended Feb. 2, as compared to the same period during 2012.

Those sales gains are very significant because they were generated during a holiday shopping season that was characterized by huge discounts from all of the major U.S. retail store chains in an effort to lure shoppers into their stores.

Looking forward, the company announced on Feb. 26 that it expects its same-store sales to increase 3 percent-5 percent, and for its gross profit margin to improve, during the quarter ending May 2, 2014. For the full fiscal year ending January 31, 2015, the company expects its same-store sales to rise by approximately 7.5 percent and for its gross profit margin to “improve significantly”.

J.C. Penney’s management team made similar positive statements during early 2013, saying they were “building a world-class organization that will be instrumental in delivering a revolutionary shopping experience that is unlike anything that exists in retail today ... [and that they would] ... create long-term shareholder value, as we become America's favorite store.”

The company’s management also stated during early 2013 that they expected the changes they were implementing to reduce the company’s operating expenses to below 30 percent of its revenues.

Unfortunately the company’s CEO at that time, Ron Johnson, and his team of personally-selected executives that he referred to as “the best internal and external talent in the industry,” failed miserably in their efforts to accomplish those goals.

For example, J.C. Penney’s income before taxes widened to a loss of $1.9 billion for the fiscal year ended Feb. 1, 2014, from a loss of $1.5 billion during the prior year, on an 8.7 percent decline in the company’s revenues. That’s after the company’s revenues declined by a whopping 24.8 percent during the fiscal year ended Feb. 2, 2013 when Johnson was in charge of the company’s operations.

Meanwhile, the company’s operating expenses remained at 41.3 percent of its revenues for the fiscal year ended Feb. 1, 2014 — nowhere near the less-than-30 percent level that Johnson had projected.

Fortunately, Johnson was replaced during mid-2013 with the company’s previous CEO, Myron E. (Mike”) Ullman, III, who served as J.S. Penney’s CEO from 2004 to late 2011.

Unlike Johnson, who implemented numerous store initiatives that focused on up-scale shoppers during his disastrous 17-mionth tenure at J.C. Penney, Ullman is taking steps to reinstitute the company’s previous heritage, since it was founded during 1902, of focusing on middle-income shoppers and offering a wide variety of private-label brands in its 1,100 stores across the United States.

And, while Johnson was paid more $52 million during his brief tenure at the company, Ullman accepted a total compensation package of only $1 million for the year ending Dec. 31, 2013. That’s substantially less than the amount of money that the vast majority of CEOs at large companies like J.C. Penney are paid.

While it’s way too early to know whether or not Ullman will be successful in turning around J.C. Penney, he appears to be making some good progress.

Analysts at Citigroup appear to agree with my assessment, with that investment banking firm upgrading its rating on J.C. Penney to “buy” on March 12, from a previous “neutral” rating, on its expectations that the company will continue to deliver positive same-store sales growth by returning to the basics, eliminating “inappropriate merchandise”’ and focusing on private-label products for the middle-income shopper.

In light of the developments discussed above, and the fact that the company’s stock closed Thursday at a price-to-sales ratio of only 0.16-to-1, JCP appears to be a very compelling investment.

Therefore, I would advise long-term investors and stock market speculators to allocate a small percentage of their financial market assets to JCP at prices below $8.50. The stock was trading early Friday at $8.73, down four cents.

David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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After replacing its prior CEO, Ron Johnson, on April 8, 2013, J.C. Penney (JCP) is finally showing signs of a potential turnaround.
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Friday, 14 Mar 2014 09:45 AM
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