JC Penney Doesn't Make Sense

 | Jan 31, 2012 | 1:30 PM EST
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Last week CEO Ron Johnson of JC Penney (JCP) laid out an aggressive plan to reinvent the dull chain of department stores. The investment community lapped up the plan like thirsty puppies. Analysts fell over one another to upgrade the company, and investors raced to buy the stock.

With 14.5% short interest, JCP shorts were squeezed until they couldn't breathe. But with the shares up almost 60% since October, is the good news in priced in? Or is this the start of a new chapter for the company?

Johnson, the mastermind behind the success of the Apple (AAPL) store, has big plans to reinvent JC Penney. Johnson's new pricing strategy takes effect on Feb. 1 and aims to get off the merry-go-round of sales, discounting and aggressive advertising. Last year the company had 590 different sales and spent about $2 million per sale. By lowering prices an average of 40% throughout the store and eliminating sales, he hopes to convince customers that JC Penney offers value all year long.

The company also plans to install 100 mini-shops in each location, spend $800 million on renovations, drastically cut spending by $900 million and reduce advertising by $240 million. If all goes according to plan, by 2015, the entire chain will have a new look, higher gross margins and healthier cash flow. Customers will be confident they are getting the best prices and won't have spent their time waiting for "one-time only" 50%-off sales.

I'm skeptical.

With the Apple stores, Johnson started the chain from scratch and had a demanding boss who watched every last detail -- Steve Jobs could spend two hours arguing over the proper shade of gray. Johnson, while a very competent manager, has no such mentor now, nor does he have an organization with the ambition of Apple underneath him. I'm sure Penney has an intractable culture with layers and layers of bureaucracy; it has more than 150,000 employees. That's an awful lot of people to motivate.

And with the stock up so much so fast, why pay up? It's a retailer, after all. JC Penney will have a bad holiday season or will get stuck with winter sweaters in the summer. If Johnson's plan is successful, you'll have plenty of other opportunities to buy the stock.

And another thing: Johnson said JC Penney would offer no guidance nor report monthly same-store sales. Who buys the shares of companies that issues no guidance? After all we've been through the past few years -- bankruptcies, frauds, etc. -- what fiduciary owns the shares of a company that doesn't provide even basic transparency? Who needs that aggravation nowadays?

I would wait and see what happens, especially with the new pricing strategy set for launch tomorrow. To me, JC Penney is a work in progress -- I'll wait for some tangible results.

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