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J.C. Penney (JCP): Compare And Profit

 February 01, 2013 11:06 AM

(By Kevin Donovan) Goodbye "Jacques Pennay."  Hello J.C. Penney, the all-American original with a blunt message.  The department store chain has discarded its attempt to become a destination store and returned to competing on price, a strategy switch we think could boost traffic, sales and the stock price of the beleaguered retailer.

To be sure, J.C. Penney Company Inc. (JCP) has drawn raspberries from the investing punditry who have pointed , with justification, to Penney's dismal recent track record.  The company has posted losses and declining sales for the last year.  Even the hiring of Ron Johnson, a marketing veteran with a successful run as an executive at Apple and Target, as CEO proved just a momentary lift for the stock last summer.  The shares reached a high near $43 in the past year and have traded as low as $15.69.  We think the stock has bottomed and has value that mirrors its new marketing direction.

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Johnson came in with the idea of breaking the cycle of Penney's continual promotions with the idea that customers stayed away, waiting for the inevitable discounting and couponing that the chain indulged in to get feet traipsing through its doors.  He's changed his mind, embracing an everyday low prices paradigm.

He has returned to a discounting strategy with a twist – advertising prices alongside with a higher price  quote for the same item "elsewhere."  For example, one television spot highlights that wardrobe staple the collared golf shirt, noting that the same quality shirt Penney's is offering for $9 is found at that "elsewhere" competitor for $19.  The comparison-pricing ploy is also used in the stores themselves in an attempt to convince shoppers to reach for their wallets.  We think the strategy could work in an economy still marked by a consumer who, though stronger, is still far from spendthrift territory and can be persuaded by the "value" message.

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What's more, despite the downward cascade in the share price, several valuation measures suggest the market  also retains some confidence in Penney's future.  Cash per share is just $2.40, putting the price-to-cash ratio at 8.50, meaning the rest of the company is valued at about $12 per share.  Yet the company remains cheap versus competitors.  Macy's and Kohl s trade at price-to-cash ratios of  12.36 and 19.36, respectively.  On a price-to-book basis, Penney's logs in at 1.27 compared with 1.75 for Kohl's and 2.81 for Macy's. 

Meanwhile., at 0.3, Penney's price-to-sales ratio lags the 0.56 and 0.58 measures for Kohl's and Macy's, respectively.  Of note, although Penney's operating margin is in negative territory thanks to GAAP losses, its gross margin is comparable to peers at 33%.  Translating that gross margin into profitability will be a focus going forward.

And we think Penney has the muscle to stick to the value proposition.  It's worth noting that despite its bout of trouble, J.C. Penney maintains a strong balance sheet with a debt-to-equity ratio of 0.48 and a quick ratio greater than 1.00.

J.C. Penney has posted losses of $0.25, $0.37 and $0.93 per share the previous three quarter and is expected to post a loss of $0.05 per share for the January quarter when it reports earnings at the end of February. 

While the new pricing strategy could be a pre-emptive strike against a bigger-than-expected loss in the latest quarter, it does prove that management is willing to change when something isn't working, like our golf swing.  We think we'll check out the $9 golf shirts, too, this spring.



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