With J.C. Penney Company, Inc. (NYSE:JCP) firing Ron Johnson, the ancient retailer looks to be going into a tailspin. CNBC’s Jim Cramer suggested investors consider looking at some of the company’s rivals, who should benefit from the retailer’s struggles.
Cramer says avoid J.C. Penney
Cramer believes that investors should avoid J.C. Penney Company, Inc. (NYSE:JCP). This may be sound advice. Trading at these levels, the company might have some value based on its retail assets alone. In addition, some of Johnson’s most promising innovations — like the Joe Fresh boutique — were only recently rolled out, and could lead to better sales.
But at the same time, the potential for further setbacks remains. The company could lose its legal battle with Macy’s, Inc. (NYSE:M) over Martha Stewart’s products, for example, or Bill Ackman’s Pershing Square could exit its roughly 17% stake.
As the company replaced Ron Johnson with former CEO Mike Ullman — the CEO Ackman pushed out of the company in 2011 — Ackman is probably looking to exit his stake.
Perhaps Ackman will stick around, but as the strategy he pushed for has so clearly failed, an announcement of Pershing Square having exited its stake could come at any time.
Cramer says look at competitors
But while avoiding J.C. Penney Company, Inc. (NYSE:JCP) might be sound advice, Cramer’s suggestion to look at alternatives is a bit off base. In particular, Cramer suggests investors consider Macy’s, Inc. (NYSE:M), The TJX Companies, Inc. (NYSE:TJX) and The Gap Inc. (NYSE:GPS).
Those stocks may be good investments in their own right, but there will likely be little positive effect on them from Ron Johnson leaving J.C. Penney.
Johnson’s damage has already been done. While the stock might continue to drop, it can’t get worse for the customer. Same-store sales have already declined roughly one-third — the customers that were going to leave J.C. Penney for other retailers have already gone.
Before Johnson left, he reinstituted the practice of excessive discounting. Meanwhile, more of his shops have been opening. With Ullman at the helm, Johnson is no longer there to tinker with J.C. Penney’s model and drive away additional consumers.
Thus, competing retailers won’t have customers to gain — unless the company goes completely bankrupt and sells off its stores.
The J.C. Penney-fueled run may have already happened. The TJX Companies, Inc. (NYSE:TJX) shares are up better than 18% in the last year, better than the S&P 500. Ironically, TJX utilizes a similar everyday low pricing strategy to the one Johnson wanted to implement at J.C. Penney. But its bargain prices and similar merchandise is an obvious draw to former J.C. Penney Company, Inc. (NYSE:JCP) shoppers.
Macy’s, Inc. (NYSE:M) is up a less impressive 7% — weaker than both the S&P 500 and the SPDR Retail ETF. Macy’s is perhaps a bit more upscale than J.C. Penney, but it does have some product crossover. Both stores, for example, sell men’s Levi’s jeans around $40 per pair (Macy’s online store/J.C. Penney’s online store).
Yet, if Macy’s can only manage a 7% gain in a year in which J.C. Penney was eviscerated, further gains on J.C. Penney’s behalf seem unlikely. If anything, the company’s court battle over J.C. Penney’s ability to sell Martha Stewart products could be more substantial — a legal victory would eliminate potential competition.
Cramer’s recommendation of The Gap Inc. (NYSE:GPS) is the weakest. To be clear, The Gap owns a number of different clothing stores, including its namesake brand, Banana Republic and Old Navy. Gap is slightly more upscale than J.C. Penney — to go back to the example of men’s jeans, it sells them for $60 and up — while Banana Republic is far more upscale. Old Navy is the most comparable to J.C. Penney, but it makes up only a portion of the larger Gap corporation.
In the last year, shares of The Gap Inc. (NYSE:GPS) are up nearly 40%. While this is nearly the inverse of J.C. Penney’s 60% decline, given their different markets, other factors are likely at work.
Too late to play J.C. Penney’s loss
With a 30% decline in its sales, J.C. Penney Company, Inc. (NYSE:JCP) has obviously lost customers to other stores. That said, with Ullman at the helm, as long as the company does not completely liquidate, it’s unlikely that the retailer will lose more.
It’s too late, then, to try to profit off J.C. Penney’s demise. Avoiding J.C. Penney at this time could be smart, but jumping into its competitors would not be.
Joe Kurtz owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned.
