Dropping the Dime on JCPenney

02/10/2012 12:34 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Wall Street is buzzing over the comeback strategy devised by the new CEO. But this Steve Jobs disciple may have inherited his mentor’s willingness to bend the truth, writes MoneyShow.com senior editor Igor Greenwald.

We don’t need to read the FBI file on Steve Jobs to stipulate that there’s a thin line between inspirational leadership and willful self-deception.

Leadership doesn’t work without a convincing projection of self-confidence. In a universe where there are no guarantees, such displays are of necessity a leap of faith and a sales tactic. Any leader worth his salt knows that failure is a possibility, albeit one that shouldn’t be mentioned publicly.

Why should we care, and what’s Steve Jobs got to do with anything? Because, as it happens, a close associate of the late, great business icon has just pulled off a sales pitch that would have made Jobs proud.

Ron Johnson, architect of Apple’s (AAPL) widely admired stores and before that of Target’s (TGT) cheap-chic heyday, has been hired to restore JCPenney’s (JCP) luster. It’s a tall order, and while we won’t know for at least a year if he’ll succeed, Johnson’s already got Wall Street chug-a-lugging his Kool-Aid.

Penney’s stock jumped 17% the day Johnson’s hiring was announced in June, but soon gave it all back and more, spending six months in the purgatory reserved for retailers with declining same-store sales.

Then, two weeks ago, Johnson and his team presented their blueprint for transforming the chain into “America’s favorite store.” The stock jumped 19% to a three-year high on a massive short squeeze, and hasn’t looked back.

The plan is to cut through the confusion of pervasive discounts typical of department stores with steady, straightforward pricing, supplemented by monthly seasonal specials and payday Friday deals.

Penney’s often drab stores will be spruced up and subdivided into mini-shops organized by brand, along with a “town square” featuring as yet unspecified services, possibly including haircuts, cooking demonstrations, and whatever else it takes to draw a crowd.

Martha Stewart is on board with a new marketing deal, though rival Macy’s (M) has sued her for breach of contract. Johnson has also hired Ellen DeGeneres to represent the brand, and blown off subsequent boycott threats by the Million Moms anti-gay group.

Johnson seems to be aiming for the same clientele that turned Target into a French-sounding yuppie haven during the late 1990s.

But there’s a problem with that plan, and it’s the same one that has bedeviled other middlebrow chains over the past decade. Many of those young professionals have either gotten rich enough to shop at Nordstrom (JWN) or poor enough for the dollar stores and Walmart (WMT).

The middle ground in American retail has been shrinking, just as it has in the broader society. And it will take more than clever marketing and celebrity spokespeople to elbow out such fierce competitors for those middle-class dollars as Macy’s and Kohl’s (KSS).

In the short-term, none of that matters because the stock has spooked its many short sellers, and because Johnson surprised the Street by promising to finance the $800 million he plans to invest in the renovations this year alone out of operational savings. Analysts’ forecasts for the coming year proved too low relative to the company’s optimistic forecast, and had to be hastily raised.

The thing is, even if Penney executes as promised, it will match Kohl’s in operational efficiency no sooner than 2015. And in the meantime, the stock sells for 21 times upwardly revised forward earnings estimates, making it twice as expensive as the much more efficient Kohl’s and Macy’s.

Perhaps Johnson really does have the Jobs magic touch. His investor presentation was pretty shameless in trading on the association with Apple’s success, right down to comparing Penney to Apple at its 2001 nadir. But the run-up in the share price looks out of whack, regardless of how high the short squeeze takes it.

Johnson seemed to acknowledge as much when, two days after the investor presentation, he unloaded a lucky 777,000 Penney shares, nearly half of what he had been granted last year to compensate for compensation foregone at Apple.

The company said he sold to cover taxes on the grant, which seems a stretch. More likely, Johnson understands that even the best sales job in the world can only distort reality so much.

And the reality is that the stock is already pricing in an epic turnaround that may not work out, and almost certainly won’t work out to the degree investors currently expect.

Related Articles on STOCKS