J.C. Penney Company, Inc. (JCP)…Higher?

Shareholders in J.C. Penney Company, Inc. (NYSE:JCP) got another lifeline last week when reports surfaced that Goldman Sachs has lined up $1.75 billion for the company, backed by J.C. Penney’s real estate. All of this is great news for J.C. Penney and its shareholders. The stock should continue its run higher.

As of Feb. 2, J.C. Penney Company, Inc. (NYSE:JCP) operated 1,104 department stores in 49 states and Puerto Rico. (Hawaii is the only state that doesn’t have a store.) Of these, 429 were owned, including 123 located on leased ground. The company also operates www.jcp.com, where it sells merchandise. At the end of 2012, the company’s sales were divided as follows:

J.C. Penney has a current market cap of $3.45 billion. The PEG ratio is 0.23. Margins have been dismal and the company is currently losing money. Comparable store sales dropped 25.2% in 2012 from 2011. However, former CEO Ron Johnson is now gone, and prior CEO Mike Ullman is the new interim CEO, with the focus now on bringing J.C. Penney back to profitability and recovering from Ron Johnson’s failed business strategy.

Ron Johnson was heralded as the savior of J.C. Penney Company, Inc. (NYSE:JCP) when he was hired by J.C. Penney’s largest shareholder Pershing Square Asset Management and its founder Bill Ackman. Johnson was the head of retail for Apple and rolled out the popular Apple stores that shoppers love. The plan was to make Penney’s hip again and bring in new customers. Unfortunately, the strategy not only failed to bring in new customers, but alienated its existing customers and drove them away.

Johnson’s strategy was to create specialty shops within each J.C. Penney Company, Inc. (NYSE:JCP) store. It was described as the company’s “Shops” strategy with stores-being-within-a-store. The first shops were Levi’s, The Original Arizona Jean Co., Izod, Liz Claiborne, and jcp brands. Johnson also changed the pricing strategy, which didn’t go over well with customers.

Major peer Kohl’s Corporation (NYSE:KSS) is expecting to post fiscal 2014 (ending Jan.) EPS between $4.15 to $4.45 based on flat total sales growth year over year. Based on the expected EPS (mid-point) this would be growth of only 3.1% year over year.

The retailer struggled during 2012 while trying to drive sales higher with aggressive promoting and investing in marketing and e-commerce initiatives. However, this has strained gross margins, where gross margin compressed by over 200 basis points from 2011 to 2012.

Kohl’s Corporation (NYSE:KSS), however, did manage to garner impressive interest from hedge funds going into 2013. There were a total of 35 hedge funds long on the stock, a 25% increase from the third quarter (see which funds were buying).

Kohl’s Corporation (NYSE:KSS)’ also focuses on exclusive brands, where back in 2004, there was only 25% of Kohl’s merchandise that was exclusive. Now there is over 50% of sales that are from private and exclusive Only-at-Kohl’s Brands. Another key for Kohl’s, unlike J.C. Penney Company, Inc. (NYSE:JCP), is that the company utilizes an off-mall location strategy, which is more convenient from an access standpoint.

Dillard’s, Inc. (NYSE:DDS) posted last quarter earnings of $2.87 per share and net sales of $2.10 billion, both below consensus estimates. Even still, on a year over year basis, EPS and net sales surged 29% and 6.9%, respectively. However, the future isn’t quite as bright. Dillard’s, Inc. (NYSE:DDS) managed to grow EPS at an annualized 64% over the last five years, but analysts expect earnings to grow at an annualized 5.5% over the next five years.

There are, however, some positives for Dillard’s investors. The company has a strong balance sheet and is not shy about rewarding investors. During fiscal 2012, the company spent $185 million on share repurchases and $252 million on cash dividends.

Earlier this year the company declared a $0.05 quarterly dividend. This after the company paid a special cash dividend of $5 per share at the end of 2012. Then in March 2013, Dillard’s, Inc. (NYSE:DDS) approved a new share repurchase program of $250 million.

Next steps for J.C. Penney

The best thing going for interim CEO Mike Ullman is that he’s not Ron Johnson. Johnson was a divisive figure at J.C. Penney’s and damaged employee morale. He was living at the Ritz in Dallas and commuting home every weekend to California on a private jet. That upset employees who were not sure if they would have a job the next day due to Johnson’s restructuring and layoffs.

Ullman will likely bring back many of the sales and coupon tactics that Johnson did away with. Penney’s core customers loved them. Hopefully, they will bring these people back into J.C. Penney stores.

Ullman will also likely work to resolve the costly litigation with Macy’s over Martha Stewart branded merchandise. Macy’s had an exclusive deal with Stewart, who then signed a contract with J.C. Penney Company, Inc. (NYSE:JCP). The two have been in litigation since. It’s a distraction the company doesn’t need right now as it looks to return to profitability.

J.C. Penney will continue with the revamping of its stores and expanding its Joe Fresh line of apparel. The brand is reportedly selling well in the stores and online as well. There’s no denying that J.C. Penney needed to revamp its stores. But by doing the store-within-a-store concept, all J.C. Penney did was showcase how unappealing the rest of the J.C. Penney store is. The stores desperately needed new lighting and a total revamp to make the stores less dreary.

Johnson had alienated many vendors, so Ullman will also have to restore Penney’s reputation with suppliers, who are critical to J.C. Penney’s survival. The company’s relationships with its vendors are critical to ensuring that the supply chain functions smoothly and stores remain stocked.

There are three billionaires that have a lot at stake when it comes to the future of J.C. Penney. Besides Soros and Ackman, Steve Roth’s Vornado is the second largest shareholder after Ackman, but Vornado sold off a large piece of its stake before Johnson was fired (check out Ackman’s top picks).

New CEO Ullman can now focus on restoring the company to profitability, as well as building Johnson’s vision for J.C. Penney Company, Inc. (NYSE:JCP). Johnson may not have been the right man for the job, but his instinct to redesign the stores was correct. Only time will tell how Penney’s will fare, but I think the stock can easily get back into the $20s, which will make for a nice return.