J.C. Penney Company, Inc. (NYSE:JCP) is still struggling. But Bill Ackman who has taken a long position in the company, is confident that chief executive Ron Johnson can change the fortunes of J.C. Penney. And according to Ackman there are some signs of compelling upside.

The speed at which the retailer has changed itself so far is admirable. It has increased store productivity, cut $1 billion in costs and , according to Morningstar, Inc. (NASDAQ:MORN), merchandising is also improving.


Here are the reasons we think J.C. Penney turnaround is working.

Rapid Transformation

In such a scenario, J.C. Penney Company, Inc. (NYSE:JCP) couldn’t have afford to go slow. The company’s everyday-low-price strategy has attracted several national brands that don’t like to see the unimpressive “70% off” signs on their products. The company management said the turnaround would take about four years, but activist investor Bill Ackman recently said in an interview with CNBC that Ron Johnson is the wrong guy for the post of CEO if he can’t turn J.C. Penney around in three years.

The new and national brands have noticed the speed of J.C. Penney’s transformation and the management’s commitment to its revival. So, they are flocking to sign on for J.C. Penney’s new shop-in-store concept. The $1 billion in cost reduction created a dramatic change in the company’s business style and organization’s strategies, signalling that the old ways must be left behind.

Increasing Productivity At Transformed Stores

The company has transformed only a small fraction of its total square footage. The eight stores where shop-in-store concepts were implemented last year, have seen a 33 percent increase in sales. It made inexpensive and simple moves like changing the music, changing signage, adding new shops and enhancing the existing shops.

Previously customers used to cherry-pick the items with the highest percentage discount. But the new strategy encourages the customers to choose a product they really like, only then they discover the price. The everyday low price strategy has eliminated the cluttering of red big sale signs, and increased the company’s average margins by 4 percent.

Improvements in Merchandising

Stores that are yet to be transformed are witnessing the differences in merchandise and feel of the stores. The customers now discover new and exciting products. Unfortunately, the old inventory is still in clearing, which has prevented the company to implement some of its strategies. So, turnaround in merchandise is still in the early stages.

Earlier, the younger generation and women shoppers didn’t believe that JCP had fashionable footwear and apparel for them. But now you can see more trend-oriented merchandise in the stores. Morningstar noted that more and more younger people are shopping at J.C. Penney stores.

The only thing that would hold JCP back in the short-term is that its cash flows are depressed and declining. The company’s top line is down about 20 percent this year, and accounting earnings are negative.

The Buckingham Research Group said in a research report that it is still worried about J.C. Penney Company, Inc. (NYSE:JCP)’s cash flows and earnings, so analysts expect the company to under-deliver on its plans. The retailer has also filed a dispute with bond holders, saying that it hasn’t violated any bond agreements. Though  market doesn’t see the company at the risk of default, Buckingham analysts remain cautious.

The BRG has a Neutral rating on the stock with $18 price target.