Big, New Ideas From J. C. Penney

Zacks Investment Research
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Radical ideas are flourishing at J. C. Penney Company Inc. (NYSE:JCP), a leading retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, as the company recently announced a string of strategic measures to enhance shareholder’s value in the coming four years.

New pricing strategy, fresh logo, strategic merchandise initiatives, reduction in costs, enhancement of shopping experience and customers shopping at their own terms — you name it, Ron Johnson’s (Chief Executive Officer of the company) turnaround blueprint has it all. In short, the company is transforming the way it operates.

That being said, let’s elaborate a bit more on the initiatives to get a clear picture of what is on the palate.

Pricing is the Key

Calling it ‘Fair and Square,’ jcpenney (the new way of referring it) came up with a new pricing strategy that is segmented into three types of prices – Everyday, Month-Long Values and Best Prices.

The new pricing strategy aimed at keeping the prices low, will also allow the company to introduce new merchandises regularly. Moreover, as an extra topping, jcpenney will come up with 12 unique and exciting monthly promotional events every year to provide better value to the shoppers.

Further, to enrich the shopping experience, jcpenney will introduce around 80 to 100 mini brand shops in its stores.

So Much in No Time

With a Herculean task at hand, the company is in no mood to waste any more time. The transformation activities are slated to start right from February 1, 2012, with the implementation of its fresh logo, new pricing strategy and monthly cadence.

Moreover, from August 2012, jcpenney will adopt month-by-month, shop-by-shop strategy to modernize all stores with latest and unique assortments. The company said that all the stores will undergo complete transformation by the end of 2015.

Self Funding for the Change

Shifting focus from stores to financials, jcpenney’s COO Mike Kramer disclosed the long-term financial outlook. The company plans to fund the entire transformation activities through its cash from operations. To start with, the company will incur $800 million in capital expenditures in fiscal 2012 to enrich the shopping experience of buyers and to establish the company’s new in-store shops.

Shaving off Costs

To lower the competitive pressures from its peers like Kohl’s Corporation (NYSE:KSS) and Macy’s Inc (NYSE:M), the company aims to reduce costs by $900 million in the first couple of years of its transformation, resulting in lowering the expenses below 30% of sales. Moreover, the company targets expenses to be 27% of sales by the end of the transformation process.

Speaking specifically, jcpenney will abridge significant amount of costs from stores and advertising and from operations at its home office.  

Forecast Above Consensus

Management expects fiscal 2012 earnings to meet or exceed fiscal 2010 earnings per share of $2.16. The current Zacks Consensus Estimate for fiscal 2012 is $1.62 per share.

However, on a reported basis, including one-time items, jcpenney forecasts earnings of $1.59 per share.

Summing Up

Through its bold and strategic modifications, the company aims to simplify the operational structure, which will supplement it to generate positive earnings growth and boost shareholder’s value.  

Moreover, the transformation is expected to augment sales and enhance productivity at stores, which in-turn will lead to strong margin expansion.

The company will not come up with quarterly sales or earnings guidance, and will no longer provide monthly same store sales results.

Currently, J. C. Penney retains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the company’s fundamentals, we have a long-term Neutral recommendation.

 
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