Market Overview

Is JC Penney Following its Cost Cutting Rivals?


Today, a NY Post report stated that JC Penney (NYSE: JCP) planned to lay off thousands of workers. The layoffs are targeted at workers who typically retag and re-price merchandise. The retailer hopes to develop a new "everyday low" price campaign, moving away from frequent price cuts and sales. CEO Ron Johnson emphasized that the layoffs primarily targeted seasonal workers, and not full-time regular employees. "As planned, we held over some seasonal holiday hires to help us with the re-ticketing of merchandise."

The report also stated that two of JC Penney's largest investors, William Ackman and Steve Roth, have pushed Johnson to cut costs throughout the company. The retailer has closed several warehouses, outlets, and call centers, and shuttered its historically popular catalog business. Sources have also indicated that Johnson will announce further cuts this week, with advertising and company divisions first on the chopping block.

The company made a surprise acquisition last month, by taking a 16.6% stake in Martha Stewart Living (NYSE: MSO) and announcing that it would open small MSL kiosks throughout its stores. The acquisition was especially surprising given that Johnson had failed to consult Penney's home furnishings designer Chris Madden before the announcement. However, many analysts take to Johnson's turnaround strategy and believe that his success at developing Apple (NASDAQ: AAPL) retail stores could lead to some success with JC Penney. "The stake in Martha Stewart is one of the first cards played in what will be a full hand of moves to change the perception of JC Penney," said Piper Jaffray analyst Jeff Klinefelter in a previous interview with CNBC.

While JC Penney is a far different kind of company than Apple, Johnson hopes to expand on that company's philosophy of offering exclusive products at prices than most customers can afford. Johnson is also considering the shift to online sales within the marketplace, and could shutter some retail locations to focus on sales from the company's website. The company also plans on shuffling its product offerings to appeal to a younger consumer.

JC Penney is an interesting trade. The stock has run up nearly 25% since Johnson's arrival, and analysts believe that the company could have additional upside if Johnson can continue his retail magic. The company has been left for dead by many customers thanks to its outdated stores and boring product offerings. An infusion of exclusive products and competitive pricing could make the company a player in the retail segment once again.


If you believe that this is the beginning of a turnaround story for JC Penney, consider these trades:
  • Go long JC Penney. Shares traded at more than twice their current levels prior to the recession and could see significant upside if Johnson can grow revenues over the long term.
  • Go long Target. The company has adopted a similar strategy to JC Penney by introducing exclusive product offerings at everyday prices.
If you believe that JC Penney will fail to capture its prior retail magic, consider these trades:
  • Go short JC Penney. The stock has gained significantly since news of Johnson's hire, but could see downside if he cannot replicate the retail success he created while at Apple.
  • Go short a retail ETF. Many retailers such as Sears (NASDAQ: SHLD), Macy's (NYSE: M), and Kohl's (NYSE: KSS) face many of the same challenges as Penney's does, with dated product offerings and a large number of retail outlets which customers may not want to visit anymore. These companies could see their share prices deflate if these factors hinder future revenue growth.
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