What Would J.C. Do? (JCP)

By Glenn Curtis | February 13, 2008 AAA

It's no secret the slowing economy has hurt retail stalwart J.C. Penney (NYSE:JCP) and many of its mall-based brethren. A quick look at the company's most recent quarterly results reveals the problem all too clearly: Earnings per share for the quarter fell to $1.17 from $1.26 during the same period last year.

But it's not J.C. Penney's weak earnings making headlines; the company's recovery plan is the real grabber. I'll give you a hint - it has nothing to do with store renovations or price cuts for a change.

A Little Star Power Goes a Long Way
From time to time J.C. Penney has spruced up its stores in an effort to keep pace with newer and ritzier retailers such as Nordstrom (NYSE:JWN). It's also been known to cut prices and sacrifice margins to drive foot traffic and compete. Most people expected one of these two classic stop-gap solutions when the company revealed it was having trouble, but this time J.C. Penney is trying something a little fancier. It's launching its "American Living" line of products developed by Polo Ralph Lauren (NYSE:RL). New products include men's and women's apparel, handbags and even furniture. Price will vary, but generally speaking, they'll be about 15% higher than other high-end wares the company sells including Liz Claiborne.

CEO Mike Ullman III said the brand will lift the overall look and feel of the store, and he expects it to be a billion-dollar business in the next few years, eventually accounting for 5% of annual sales.

Follow The Money
With other high-end retailers struggling right now, this is a terrific time for J.C. Penney to get its foot in the door. The interior and exterior of its stores does little to differentiate it from the competition, so it had to do something with its merchandise to draw customers.

I don't think cheaper is the way to go. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) have a firm grasp on the low-end clothing market. Dollar stores are starting to get in on that action as well. High-end is where it's at. Any quality improvement should give J.C. Penney a leg up on Sears (Nasdaq:SHLD). Sears is too busy focusing on its waning appliance business to keep pace in apparel. The move also makes J.C. more competitive with other mall-based retailers such as Macy's (NYSE:M) and Limited Brands (NYSE:LTD). (To learn how companies fight for competitive advantage, check out Advertising, Crocodiles And Moats.)

Big-Name Brands Can Work...
In Kmart's case, its Jaclyn Smith, Kathy Ireland, and Martha Stewart brands have undoubtedly kept it in business. Macy's has been successful with its Oscar de la Renta brand, and Nordstrom has seen big interest in its Marc Jacobs brand. Meanwhile Kate Spade (handbags and accessories) are successfully being sold in high-end stores such as Saks Fifth Avenue, Neiman Marcus and Nordstrom.

...But not Always
In September 2007, Kohl's (NYSE:KSS) launched the Simply Vera brand from renowned clothing designer Vera Wang. And although many think it will be a long-term winner, the brand has not yet revived the struggling retailer. Furthermore Sears, long a player in the apparel business doesn't appear to be getting much punch out of its Structure or Covington lines as suggested by its weak holiday same-store-sales figures.

Ralph's Success will Rub Off
I think J.C. Penney will be successful. The demand that Polo Ralph Loren is seeing for it's wares is exceptional. In fact, while most retailers and clothing designers have been struggling, Ralph Loren saw its Q3 revenue increase 11%, its gross profit increase 10% to $677 million from $614 million last year and its EPS increase 5% to $1.08 this year from $1.03 a share last year. In other words, it Polo Ralph Lauren's style, quality and appeal among the masses is growing. This is exactly the shot in the arm J.C. Penney needs. (For more on these numbers, see our Fundamental Analysis Tutorial.)

Bottom Line
J.C. Penney is in the middle of a major new product launch. This move has much greater potential than cutting prices or redesigning a few stores. Over time, I think the Ralph Loren brand will change the feel at the store level and drive sales.

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