J C Penney Company Inc (JCP): How Pennies Make Dollars by Teddy Vallee

  • Management’s continued re-merchandising efforts and strategic emphasis on the store’s “center core” will drive traffic, cross-shopping, and same store sales
  • J C Penney Company Inc (NYSE:JCP)’s focus on increasing foot and athletic wear will drive incremental top line growth and traffic
  • J C Penney’s Omnichannel opportunity is greater than a billion dollars and is underappreciated by the street.
  • Apple Inc. (NASDAQ:AAPL)’s ibeacon and Apple pay technology will significantly enhance the mobile in-store shopping experience, resulting in increased sales and traffic.
  • Kohl’s Corporation (NYSE:KSS)’ dismal leadership, mediocre omnichannel proposition, and lack of full out store remodeling create a material opportunity for JCP to gain share.
  • The death of Sears provides an excellent opportunity for top line growth.
  • Looking out over 1-3 years, U.S. consumer balance sheets will strengthen, wages will rise, and spending will significantly increase retail sales.
  • The addition of Marvin Ellison, Debra Berman, Mike Record and the Warrior associate team put J C Penney in a position for long-term growth.

J C Penney

The recent sell-off in J C Penney Company Inc (NYSE:JCP) provides an excellent entry point for a long-term investor. After trading up about two percent during the analyst day presentation (10/8), the stock sold off significantly after the company lowered its Q3 guidance from mid-single digits to low-single digits. Given America’s strengthening consumer, the appointment of a long-term CEO, a compelling omnichannel strategy, and the mitigation of bankruptcy fears, I have significant conviction in J C Penney’s turnaround. The company is worth $19.22 per share.

Management’s continued remerchandising efforts and strategic emphasis on the store’s “center core” will drive traffic, cross-shopping, and same store sales. The in-store experience is imperative to drive foot traffic. Since 2011, JCP has spent over $2.395B remerchandising and remodeling stores; rebuilding some areas from the ground up (505 home stores ~8.6% of total sq. footage). This has increased store efficiency (elaborated on below) and provided a very attractive environment to shop in. The image below details that change.

J C Penney

Prior to Ron Johnson’s arrival, J C Penney’s store layout was comprised of racks of merchandise tightly spaced together (clutter), shown in the bottom image above. This increased the amount of on floor merchandise; however it reduced product visibility, consumer mobility and the in-store experience. In terms of visibility, if item X was placed in the middle of the area above, it would only be seen if the consumer walked through the isle where that item was hung. If the consumer chose the path towards item X, item Y in a separate row was not seen. In order to see both item X and Y, a route through a maze of racks would need to be taken. This reduced the in-store shopping experience, as the consumer monotonously traveled from rack to rack.

J C Penney Company Inc (NYSE:JCP)’s merchandising efforts materially eliminated this inefficiency throughout the store, specifically from the implementation of “shops,” shown in the image above. In these areas, merchandise is now neatly presented via wall space, manikin usage, multi-level tables and other merchandising props. As the consumer walks by a 500 sq. ft. shop, both item X and item Y are visible and presented in an aesthetic fashion that accentuates the merchandise’s value, similar to adding a frame to a picture. Further value is added by the alignment of a shop’s image to that of the brand – all the way down to the hanger. This increases the visibility and value of merchandise, which should improve the probability of conversion (percentage of consumers that enter a store and make a purchase). It is also likely that transaction sizes and items per transaction increase as the consumer is exposed to additional items previously hidden.

At the recent analyst day, the company highlighted the “center core” opportunity, which is comprised of beauty, footwear, jewelry, handbags, accessories and intimate apparel attractions that drive customers to the heart of the store, facilitating cross shopping. Center core is extremely important given its higher growth rate and operating margin relative to apparel. Management believes that this is a $1B opportunity over the next three years, or $333mm per year in incremental revenue, and have acknowledged the core area is currently deficient relative its competition.

J C Penney

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