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JC Penney: Day 2 of the ‘Most Important Day in Retail’

Stacey Widlitz|Retail Consultant and Independent Analyst
Thursday, 26 Jan 2012 | 12:13 PM ET

Before the start of JC Penny's analyst day, William Ackman, largest holder of of JCP shares and Board Member, told CNBC it would be the most important day for retail in 25 years.

Now that is a lot of pressure

JC Penny
Ryan T. Conaty | Bloomberg | Getty Images
JC Penny

While Ron Johnsonlaid out a plan for revamping the tired retailer yesterday, investors did not necessarily agree plans for fair and square pricing, new marketing initiatives (including Ellen DeGeneres as brand ambassador) and store within store concepts were necessarily revolutionary.

Today however, was a different story. Day 2 was the day to talk numbers rather than focus on the fact that Calvin Klein, the Olsen twins or Martha might be sitting next to you in the audience. And the numbers sent the shares soaring 11 percent. (Track JCP Here)

JCP issued guidancethat it would meet or exceed 2010’s bottom line of an adjusted EPS of $2.16. Caution though, improvements going forward will be back half weighted as things do not happen overnight. Whenever companies back half weight guidance it should raise a huge red flag but in this case investors are willing to give JCP the benefit of the doubt. And to be fair there seems to be a lot of low hanging fruit to get rid of to get to that number.

The company has identified $900 million of cuts that will be made over the next two years. SG&A as a percent of sales have been running in the 33 percent range, well above competitors including Kohl’s. JCP is confident it can get that number down to sub 30 percent by 2013 and 27 percent by 2015. Who knew there was so much room to go to flat from fat?

Consider where the cuts are coming from. Stores will account for $400 million. A clear example? Stores printed 200 million signs last year. And those signs take humans to keep replacing price points. Rather than stores being bombarded with three promotional packets per week the new fair and square pricing strategy will bring that down to one packet per month. That is worth $50 million alone. Cha-ching. Stores also take 2,500 labor hours to operate at current speed versus 1900 for competitors. That will provide an additional $250 million. And by the way if you have noticed the sleepy sales people resting at cash registers during non-peak hours that wont last much longer. The elimination of 9 registers per store will ring up another $100M in savings

Now we turn to Home Office (or headquarters) savings. Note I am guessing headhunters in the local area just had a huge uptick in resume applications. Savings at the Plano, Texas, HQ are estimated at $200 million. Efficiency is not the greatest at present. For example, there are 8 levels of management versus five at many retailers. The kind way to put it is the goal is for a flatter organization.

While a self financed turnaround and guidance that provided a bit of a relief is sending shares soaring today don’t forget that more fuzzy sales part of the equation. Only time will tell whether branded store within stores, clearer pricing, a Town Square and Ellen will turn this ship around.

And since JCP will put an end to monthly same-store releases it may feel like 25 years before we know if the sales part of the equation will help this stock grow into its lofty multiple.

Stacey Widlitz is the President of SW Retail Advisors Inc. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years.

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