Penney's Turn Is for Real

 | May 16, 2014 | 12:30 PM EDT
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Retail turnarounds are next to impossible. Once a spiral begins, it is almost impossible to break because customers get turned off, suppliers get skittish, banks run from you and the next thing you know, it's over. I have seen this pattern repeatedly when same-store sales go negative for a substantial period of time. That's why I value that indicator so much. It's rarely proven to be wrong.

That's why this turnaround, and it is a turnaround, at J.C. Penney (JCP) is so amazing.

Here's a company that, at one point, reported comparable-store sales down 30%, a staggering number and one that precipitated a firing of flailing CEO Ron Johnson a little more than a year ago. The company brought back Mike Ullman, the former CEO whom Johnson replaced, and he immediately set about trying to turn the company around, even though his appointment was meant to be only temporary.

Ullman made several shrewd moves immediately, the first being raising cash through a combination of new credit lines and a brutal equity offering that crushed the stock.

Next, he cleared out all of the merchandise that Johnson had brought in because it had turned off shoppers who had sworn allegiance to the old Penney. The displays, chiefly of more expensive goods than the clientele had flocked to Penney's for, sent shoppers to just about every other retailer, especially Macy's (M), which had been a huge beneficiary of Penney's downfall.

Then he returned Penney to its roots, offering private-label brands that Johnson had gutted. Given the much more bountiful gross margins of private label to expensive brand-name merchandise, this change immediately gave a lift to cash flow, which took any monetary worries off the table.

Now, amazingly, Ullman's going on offence. First, he's been made permanent CEO, the temporary appellation banished by his remarkable success. Second, the lapsed Penney shoppers are returning, as the marketing and promotions that Penney had been doing before Johnson are revived. Finally, he's got the home furnishing department, one of the best sources of profit, totally in synch with shoppers desires, the only merchant that can claim to have strengthening sales in that lucrative category.

The result is a remarkable return to growth with a 6% same-store sales increase and a promise that there will be many good months to come, quite a switch from the 30-straight-months of negative comparable sales numbers.

Now, there are always going to be setbacks in turnarounds. I have been behind Rite Aid's (RAD) turn for more than a year now and that's given you more than a double for your money. But during that turn, which was accomplished in stages similar to Penney's revival, there were some fits and starts that caused people to lose heart, even as I urged shareholders to stay long and still do.

I feel exactly the same way about Penney. It will not be a straight line. I am sure there will be setbacks. But this turn, like that of Rite Aid, is for real. Ullman's accomplished a huge amount in the last year. But I think he's just getting started and Penney's not going away, it's coming back. I think punished shareholders are, at last, going to be rewarded for their perseverance and it is not too early to wish him congratulations. 



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