J.C. Penney Stock: Back to Earth

It has been less than four months since my bearish post on J.C. Penney (JCP). Since then the $42 stock has fallen nearly 40 percent to $26 per share. It turns out Ron Johnson does not have magical pixie dust to sprinkle on his 1,100 stores. As the retailer slashes prices on old merchandise, initiates an everyday low pricing strategy, and begins shifting towards its “stores-within-a-store” concept, sales and profits are plummeting. Same store sales fell 19% last quarter, a figure almost unheard-of in the retail sector. The stock is below its level on the day Ron Johnson was hired.

So what now? Well, the stock is no longer clearly overvalued, as it was four months ago. In the mid-twenties, it now has material upside if Johnson’s plan bears fruit. It will still take a long time, so investors need not rush in if they still believe in the new management team. That said, it is probably time to start formulating a game plan if you want to get in. The first quarter results were really the first in what may be a series of bombs as the company right-sizes its inventory and pushes forward with its revamp. The year-over-year comparisons early next year will be very favorable for the company. And who knows, maybe Johnson can drum up some excitement over the holiday season. He does have another six months or so to make a strong push there.

For investors who want to get in on the Ron Johnson JCP experiment, it seems reasonable to scale in slowly with an understanding that Q4 2012 and Q1 2013 may be when we start to see the sales and profit figures turn around. Between now and then we really don’t know how bad it will get. The stock could certainly drop to the low 20’s or even high teens depending on how 2012 progresses and if the red ink continues short term.

Still, as Bill Ackman of Pershing Square Capital Management pointed out shortly after JCP’s recent earnings miss, there is still a lot of potential here and we are really only in the first inning of the company’s plan. Specifically, he pointed to sales of $600 per square foot in JCP’s in-store Sephora boutiques. If Johnson can get exclusive merchandise in JCP and mimic the Sephora “store-within-a-store” concept, there is certainly upside here. Given that the stock was worth about this much before he was even hired, he would really have to screw up the entire brand and alienate his customers in order to destroy the stock permanently. As a result, JCP’s turnaround remains a very interesting story to watch.

Full Disclosure: No position in JCP at the time of writing, but positions may change at any time