Old-School Retailer Goes Back to Basics

02/13/2012 7:15 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Many retailers have had a tough go of it during the US economic troubles, and one of the poster children was this iconic American store. But those days are behind it now, writes Mike Cintolo of Cabot Top Ten Trader.

JCPenney (JCP) is far from being a growth stock, but the market seems convinced that it’s on the cusp of a powerful turnaround.

Indeed, the company is just embarking on an aggressive turnaround plan—actually, it’s more of a total transformation, and the stock is strong today because investors like what they’re hearing.

It all started with new CEO Ron Johnson, who officially took over in November; he was the former head of retail operations for Apple (AAPL) and was the pioneer behind the hugely successful Apple retail stores.

Johnson recently announced a host of changes that will be implemented in the months and years ahead—a new everyday-low-price strategy, with the price of many items cut 40% or more to better compete with the likes of Target (TGT) and Walmart (WMT).

More than that, though, the company will be cutting back on myriad (and often confusing) promotions, and also reorganizing the stores into collection- and brand-specific layouts.

Johnson will be investing $800 million this year to finance the transition. But on the other side of the coin, he believes the company can cut costs by $900 million during the next two years. All in all, the top brass thinks earnings this year could leap above $2.10 per share—miles above estimates of $1.65 or so.

Of course, there’s no proof that this turnaround will work, but the market is putting its faith in Johnson and the path he laid out last week. It’s an intriguing situation.

JCP has been anything but a growth stock for years, though it has had some big multi-year moves—it’s gone from $79 in 1998 to $9 in 2000, then back up to $87 in 2007, before crashing to $14 in 2009. Since that most recent low, not much had been happening…which was why new management was brought in.

But that’s changing; JCP built a beautiful eight-month cup-with-handle base, including a nice, tight four-week zone in the mid $30s. Then, last month, the stock exploded to new highs on volume that was nearly ten times average!

It’s not going to double overnight. But after a long period of nothing, JCP should move higher from here.

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