J.C. Penney Tries to Bite the "Apple", Gets a Worm
In a retail failure heard around the world this morning, J.C. Penney (NYSE: JCP) has struck a fearful chord in the minds of analysts banking on a quick turnaround story. The department retail chain admitted that its same store sales declined just shy of 19% in the first quarter, proving that plans in progress to flip the future of Penney's around are inadequate.
Unfortunately for JCP investors, the disappointing results did not stop there. Even though levels are down 9.5% from last year, inventory continues to be too high in relation to sales growth. On top of this, the retailer is currently operating well below its $900m cost reduction goal, considering that management still strives to meet an almost impossible-to-achieve 4Q13 deadline.
With so many issues plaguing the struggling business, one would think the integration of a former Apple (NASDAQ: AAPL) executive would have provided the company with the boost it needs. Well, the exact opposite is true. In fact, JCP Chief Executive Officer Ron Johnson has quite a difficult road ahead of him if he hopes to achieve mega-success for Penney's in the same fashion that he previously did with AAPL.
This may mean ditching his strategy that entails J.C. Penney behaving like a start-up company once again. Johnson wants his retail stores to perform at the stellar level Apple now functions at, but are technology and apparel businesses meant to be commanded in the same fashion?
According to the man himself, nothing could make more sense. However, not everyone agrees with Apple-applied logic in the circumstantial case of J.C. Penney. Researchers at Deutsche Bank believe JCP's turnaround will take several years, with evidence proving there is no quick fix remedy for a disease so severe - and they aren't the only ones.
"Marketing tweaks and new product introductions are underway to turnaround (10)% traffic, however, we believe 2012's transformation will likely take longer to execute especially in a more competitive retail backdrop. We believe the required steeper 2H sales ramp will be tougher to come by and, as a result, our FY12E EPS, excluding pension expense, sits below guidance at $2.00." Goldman Sachs said in its morning report.
While guidance may be difficult to attain at the rate JCP is going, Kohl's (NYSE: KSS) analysts are much more hopeful that a sluggish first quarter will quickly reverse, with a positive 2H on the horizon.
KSS, one of JCP's main competitors, is in the process of improving value, products and store experience for customers. With the newest repositioning tactics, research firms are becoming increasingly confident that the department store will begin reporting quarterly beats in the not-so-distant future.
Piper Jaffray noted that Kohl's is undergoing a favorable discretionary cycle, particularly in the apparel category. While analysts maintain a muted near-term outlook on the company, a second half recovery is widely anticipated.
Recent weaknesses in the department store sector have created great opportunities for investors to purchase shares. However, it may be a while before worthy turnarounds and profitable shares come to fruition for both KSS and JCP.
JCP is currently trading at $28.06, down 24.59% year-over-year, while KSS is trading at $46.49, down 16.04% year-over-year.
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Latest Ratings for JCP
|Dec 2014||Goldman Sachs||Downgrades||Neutral||Sell|
|Nov 2014||Morgan Stanley||Reiterates||Underweight|
|Nov 2014||JP Morgan||Maintains||Neutral|
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