Can J.C. Penney Capture Some of Apple's Retail Magic?
Today, J.C. Penney shares fell nearly 7% after the company announced a cut in its fourth quarter guidance. The company guided Q4 EPS to be in the range of $0.65-0.70 against a prior guidance of $1.05-1.15. Analysts had forecasted EPS to be $1.08 for the quarter. Investors have watched the retailer closely ever since former head of Apple retail stores Ron Johnson took control, hoping that the CEO would infuse some of his creativity into J.C. Penney retail stores.
J.C. Penney stores has retained an outdated look for much of the 21st Century, failing to capture a sophisticated look that competitors like Express (NYSE: EXPR) and Abercrombie & Fitch (NYSE: ANF) have pioneered. Many consumers do not view J.C. Penney as sexy or cool, two traits that are universally required of most fashion retailers today. Johnson has taken steps to revitalize the product line, signing a contract with Martha Stewart Living (NYSE: MSO) and acquiring the rights to Liz Claiborne.
Johnson brought in Michael Francis, one of Target's (NYSE: TGT) former retail gurus to improve the layout of its stores. It has also opened small Sephora stores within its large retail outlets and plans on doing the same with Martha Stewart. This strategy can help bring attention to some of Penney's more popular brands, many of which are unknown to the average fashion consumer.
Many retailers have struggled as of late, as customers were extremely selective during the recent Christmas season. Retailers found that very few customers were willing to pay full price, often opting to delay or forego purchases without discounts. Retailers like Penney's have been forced to balance discounting and sales margins, making income growth difficult for most retailers. While high end retailers like Saks (NYSE: SKS) and Nordstrom (NYSE: JWN) have benefited from a cash flush customer base, middle range retailers like Macy's (NYSE: M) have struggled to gain the same traction. "The customer is in the driver's seat, they have the power," stated David Bassuk of AlixPartners. "We'll still see aggressive promotions in the next six months."
JC Penney is still a retailer in transition. However, the hiring of Johnson will ensure that the company does not go the way of Sears (NASDAQ: SHLD) and be forced to close stores. While the retailer still must overhaul its product line and retail stores, it appears that Johnson is well on his way to restoring the brand to its former glory.
Traders who believe in the potential of J.C. Penney or the retail sector should consider these trades:
- Go long shares of J.C. Penney, or high end brands such as Saks or Nordstrom. Penney's stock has been beaten up over the past few years and could have some upside. High end retailers have also performed well as of late.
- Go long a retail ETF. If consumers return, the entire sector could have a positive 2012.
Traders who believe that consumers will continue to be selective with their wallets should consider these trades:
- Go short J.C. Penney. The retailer could encounter difficulties in consumer demand in its rebuilding process and might see some short term downside.
- Go short a retail ETF. Many retailers struggled to sell goods at full price during the holiday season, drastically cutting into margins. The sector could see downside if the trend continues.
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