J.C. Penney Can Hope to Emulate Best Buy

 | Aug 21, 2013 | 3:00 PM EDT
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Investors have the opportunity to evaluate in real time today two retail turnarounds. Many investors may be tempted to conclude that what happened to one of the companies can happen to the other. I'm talking about the very differing current states of Best Buy (BBY) and J.C. Penney (JCP). 

You don't have to go far back to when Best Buy looked as if it was ultimately going to be a victim of the Wal-Martization an Amazonation of the retail world. Just nine months ago, Best Buy shares were trading at an all-time low of $11 and change, sales were eroding, inventory was getting older and losses were mounting. Best Buy was becoming a live shopping catalog.

Customers would walk in and browse around for whatever TV or computer they wanted. Then they would leave and order online -- from Amazon. Best Buy's big- box model was doomed. The best selling and most profitable products -- smartphones and tablets -- required a fraction of the shelf and storage space needed to sell a 50-inch flat screen.  

Fast forward to today and Best Buy shares are trading for around $35, up 200% in less than a year. The company reported on Tuesday that it earned $266 million, compared to $12 million a year ago. Revenue was essentially flat, meaning that Best Buy is making more profit per dollar. This greater efficiency is what has Mr. Market so fond of Best Buy today. It has found a way to compete again.

The turnaround for J.C. Penney will not be as easy. Even though both are discretionary consumer retailers, Best Buy has far less competition. J.C. Penney has to contend with dozens of competitors. Best Buy also didn't succeed by trying to convince its customers that its prices were justified. Best Buy succeeded because it told its customers that they would receive the absolute lowest prices. Best Buy guaranteed it by offering to match any price. 

J.C. Penney's failures are well documented. Former CEO Ron Johnson tried to tell J. C. Penney's long-term customers that he knew what they wanted better than they did. He took away their coupons and instead offered them everyday low prices. And he tried to force feed consumers on that concept. Consumers are savvy, and if .you alienate them, it takes twice the effort to win them back.

It is true that the initiatives underway at J. C. Penney look promising; my 29-year-old wife tells me JCP now stocks some things she would happily purchase. But the transformation needs to be gradual and consumer loyalty needs to be maintained.

There is a lot of money for investors to make if J.C. Penney can pull off its turnaround. But it won't be easy. The nice pop in the shares after reporting an even worse quarter Tuesday was likely a short-term trading mechanism.

I am comforted by the swiftness with which J.C. Penney's Board has responded. Bill Ackman is a savvy investor, but his fondness for the public arena caught up to him. The board was correct in asking him to resign. His willingness to step down also demonstrates Ackman's willingness to put all else aside and do what needs to be done for shareholders. 

If JCP succeeds, there will be a similarity to Best Buy -- the stock price advance will be just as swift and huge. That alone, is why JCP should be watched closely.

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