High Bar: The Difficulty of Veritable Turnarounds In Retail
Research Director, Mad Money
From: Nicole Urken
Sent: Thursday, January 05, 2012 7:05 AM
Pier 1 Imports Dec comparable store sales increase of 11.3% vs +10.3% in Dec 2010
From: James Cramer
Sent: Thursday, January 05, 2012 7:06 AM
To: Nicole Urken
Subject: RE: PIR intro
What a horse
In today’s column, I chose to start with a brief email squib on Pier One from an exchange last week when we were looking through December retail comps. While many investors are focused in on retail sales as a read on discretionary spending (and thus the health of the consumer), the divergence in results among companies in the same cohort reflects the effect of company-specific initiatives as opposed to macro trends solely dominating the bottom lines. The ability for Pier One, the largest retailer of decorative home furnishings and gifts in North America, to execute such a strong turnaround is astounding largely because it has done so amidst a difficult environment, but—above all—because successful turnarounds are an anomaly. In 2009, Pier One traded as low as $0.10 per share, but it has become a shooting star as it has improved its merchandise mix, upgraded stores, closed underperforming locations, and focused on its e-commerce initiative under CEO Alex Smith. (Take a look at an interview with Smith from December on "Mad Money" where he discusses the company’s transformation).
One of the most controversial debates in retail of late has surrounded the potential turnaround of J.C. Penney … and whether newly-minted CEO Ron Johnson can be the medicine the long-ailing company has been awaiting. The bull case is largely based on the following: If Johnson—who essentially invented the look and feel of the Apple store—managed to transform the tech giant into one of the most successful retailers in the world, who’s to say he won’t be able to pull J.C. Penney out from under the rubbles of underperformance? Not to mention Johnson’s very strong track record during his 16 years at Target before he joined Apple in 2000. Yet as we approach J.C. Penney’s highly-anticipated analyst day on January 25—where Johnson is expected to outline his transformative strategies for merchandising, pricing and beyond—it is key to remain cautious, despite the appeal of the ‘underdog.’
While not an obvious compare, the ability for Pier One to execute such successful turnaround—evidenced most recently by the December strong monthly comps—is one reason why it’s not advisable to come into J.C. Penney right here. Why? Because the success of Pier One has been predicated on its more specific product focus in a niche market. Pier One, a $1.6bn company, is a focused specialty retailer and that is merely one-fifth the size of J.C. Penney with a current market cap of $7.5bn.
A large department store like J.C. Penney is a much different animal given increased competition across a range of categories and price ranges along with its larger size. While it is undeniable that J.C. Penney operates a profitable business with a long heritage spanning over 100 years, its ability to expand and grow its appeal will be tricky in the current mature and competitive environment in which department stores operate. In contrast, Pier One has been executing on specific initiatives—including an e-commerce push and merchandising tweaks—and also is benefitting from operating leverage as the housing market stabilizes and continues to come back from an extremely low base (albeit slowly)… a theme we have been discussing on "Mad Money" all week.
When looking at historical examples of successful turnarounds in retail, they are very few and far between. And we have seen the discount names like Sears , Kohl’s and Target continue to struggle. And even Wal-Mart’s new everyday low pricing (EDLP) refocus has left it petering along. Of course, competitors won’t go slowly into the night as JCP flexes its muscles… and the discount-oriented department store has to compete with traditional department stores like Macy’s along with off-price names like Ross and TJ Maxx to boot.
Even on a smaller, more specialized scale, turnarounds have been difficult to pull through—with Pier One’s success an anomaly. Look no further than Gap , Chico's or Jones New York . We see the continued struggles at Liz Claiborne as it aims to turn itself around: It issued downside guidance on Tuesday after the close, despite efforts of a turnaround from CEO William McComb. (Ironically, Johnson & Johnson —where McComb spent 14 years before joining LIZ in ’06—may earn a higher score these days from the fashion police than LIZ, courtesy of its Cynthia Rowley Band-Aids for ‘style emergencies') We have seen much more success from the momentum names with room for market growth like Under Armour or vendors with international growth like PVH .
Even if you believe in a successful turnaround at JCP (which in my view is unlikely), it will take time. And there will be growing pains along the way. We saw this last Thursday when J.C. Penney lowered its fourth quarter EPS guidance to $0.65-0.70 from $1.05-1.15 due to softer sales performance during the first two months of the quarter.
JCP is structurally challenged in its mid-point department store slot, particularly given so much competition from everywhere (low end and high end). While the stock could eventually work with Ron Johnson at the top, right now there’s just too much “hope” that he will be able to do it. And with no discredit to his past successes, hope is not an investing strategy, as Jim has said. Let’s wait until we hear more. Particularly given the still-recent reality that it hasn’t worked out so well for Eddie Lampert.