Can J.C. Penney and Best Buy Dig Their Way Out of This Hole?

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Even though J.C. Penney has spent the last year reforming its image, during the first nine months of the fiscal year, the retailer’s sales fell 23 percent to $9.1 billion and more than half its cash reserves evaporated as the chain recorded $433 million in losses. The company’s Chief Executive Ron Johnson, a former Apple (NASDAQ:AAPL) executive, began to transition its business strategy away from its dependence on heavily discounted products early last year. Johnson started implementing his plan to build 100 boutiques dedicated to particular brands, including Sephora, inside the chain’s 1,100 locations. While J.C. Penney said that it expected sales to fall while customers adjusted to the pricing changes, the drop was worse than expected. But the 23 percent sales decrease that the company experienced this year will be a good benchmark for next year’s sales progress.

Sears is in the midst of a 5-year downturn; the company reported a $500 million net loss in its most recent quarter. To offset these recent losses, the retailer has begun spinning off its assets in order to raise cash. Last December, Sears spun off its Orchard Supply Hardware Stores chain and in November it sold off 11 of its stores to the mall operator General Growth Properties (NYSE:GGP) for $270 million. But Sears is also contemplating a turnaround. The retailer has worked to integrate its online and retail stores, and the company also launched a loyalty rewards program to leverage its millions of customers two years ago. So far, this plan has made progress; more than 50 percent of its sales come from members in the program.

CHEAT SHEET Analysis: Do industry trends support these companies?

One of the core components of our CHEAT SHEET Investing Framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.” For most of the companies discussed above, the holiday season sales reports provided further evidence to support The Wall Street Journal’s “do or die” prediction. As data released by MasterCard and ShopperTrak indicated, holiday sales were light and shares of many retailers sold off as a result.

However,  J.C. Penney’s shares did not. A positive assessment by Oppenheimer analysts noted that retailer’s position was helped by the holiday promotions that the company ran during the season despite Johnson’s turnaround strategy.

“We are increasingly optimistic that the more price promotional stance that JCPenney is now assuming will allow the chain to make the most of a challenging Holiday selling season and position it well to re-accelerate its aggressive turnaround strategy in 2013,” said analyst Brian Nagel.

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