Is J.C. Penney’s Stock a Buy With These Apple-esque Changes?

With shares of J.C. Penney (NYSE:JCP) now trading around $17, is JCP an OUTPERFORM, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our Cheat Sheet investing framework:

There is one statistic that makes J.C. Penney’s current sales predicament clear: the retailer makes less than one half the proceeds of Gap (NYSE:GPS) per square foot of floor space. So far, Chief Executive Ron Johnson’s attempt to restyle the company has been meet with a mass exodus of customers and correspondingly dismal sales; in the last quarter, sales fell by 26.6 percent.

C = Catalyst for the Stock’s Movement:

When former Apple (NASDAQ:AAPL) executive Ron Johnson joined J.C. Penney in 2011, he saw “excessive promotions, commodity product, and a poor store experience” that limited their market to discount customers. To rectify this problem, Johnson chose to begin a complete retail overhaul; he eliminated sales and coupons in favor of “everyday low prices.” But this solution only exacerbated the company’s sales problems.

Despite the company’s third quarter report, which indicated that the company’s current pricing regime had caused an even deeper sales decline, and Moody’s late November downgrade, which said much the same, the 110-year-old department store has decided to transform 700 of its 1,100 stores by 2015.

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According to J.C. Penny’s plan, developed by Chief Creative Officer Michael Fisher, each store will incorporate 100 brand-name fashion boutiques, ranging from Levi’s to Martha Stewart (NYSE:MSO). As Reuters reported, “Their strategy is to make Penney look like an upscale specialty store that still offers inexpensive wares, not a bazaar overflowing with ordinary merchandise and discount signs.”
To this end, eight boutiques have been set up in stores, leaving approximately 89 percent of sales space designated for the “Old J.C. Penney.”  In order to halt falling sales until more boutiques have been introduced, Fisher has included an army of mannequins to bring customer attention to the company’s old-style retail space. While seemingly traditional, the mannequins illustrate more clearly what the retailer has to offer.

“Customers don’t know what to buy. They love a mannequin that shows you how to put the outfit together,” Fisher told Reuters last week. “We find anything we put on a mannequin sells out.”

However, as Reuters noted in a recent article, the strategy could work against the retailer, as the boutique-style may alienate Penney’s discount-seeking customers. Trutina Financial’s chief investment officer Patty Edwards said that the company may be going too far with its “Apple-esque” design.

Both Fisher and Johnson were once Apple executives, and Apple has the most profitable floor space of any top company in the United States, drawing in $6,060 in annual sales per square foot. J.C. Penney’s new executives are attempting to recreate the concept of the Apple store within the retailer’s boutiques to make its sales space more profitable. Compared to the company’s traditional retail store sales, boutiques have doubled the sales per square foot. But the boutiques still generate lower sales than other retail stores. For example, boutique sales amount to $269 per square foot compared to $391 at Gap.

Conclusion:

J.C. Penny released dismal third quarter results on November 9, Moody’s downgraded the company’s stock three levels on November 20, and the company’s shares have fallen more 50 percent this year. Given these figures, J.C. Penney’s stock appears unattractive. Furthermore, the stock is trading just below its 10-day, 20-day, and 100-day moving average, and in last month it received downgrades from both JPMorgan and Credit Suisse.

However, the retailer has only launched 8 of its 100 planned boutiques, and already sales in boutique floor space have doubled.

Over the short-term the retailer may be a sell, but J.C. Penny looks like a long-term WAIT AND SEE based on the key metrics above.

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