Mad Money

Cramer: JC Penney becoming viable 'turnaround story'?


JC Penney has to be one of the most hated stocks on the Street. Shares have declined from over $40 in earlier 2012 to $6 this year, as investors dumped their positions, fearing that the department store might never recover from failed strategies implemented under former CEO Ron Johnson.

Jim Cramer understands.

"Once a spiral begins it extremely difficult to break because customers get turned off, suppliers get skittish, and banks run from you. After that, same store sales go negative for a substantial period of time and, and, in many cases, your goose is cooked."

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As difficult as it may be to break free from the grip of the downward spiral, Cramer says it's not impossible.

And Cramer believes that JC Penney has broken free from the downward spiral.

"That what makes this turnaround, and it is a turnaround, so amazing," Cramer said.

Largely Cramer believes the company's good fortunes are a direct result of shrewd strategies implemented by CEO Mike Ullman, a former chief executive brought back by the Penney board.

"Ullman raised much needed cash through a combination of new credit lines and a brutal equity offering that crushed the stock," Cramer explained. That gave Ullman the necessary capital to implement significant changes.

"He cleared out all of the merchandise that Johnson had brought in, because it had turned off shoppers. Then he returned Penney to its roots, offering private label brands that Johnson had gutted."

The decision to emphasize Penney's private label brands, Cramer says, is particularly important because of the way in which it impacted long-term viability.

"Given the much more bountiful gross margins of private label to expensive brand name merchandise, this change immediately gave a lift to cash flow, which took any monetary worries off the table."

Also, Cramer said Ullman won back former Penney shoppers that were lost under Johnson's regime, by restoring promotions and coupons; marketing tools that made shoppers feel good about Penney's because they felt like they were getting significant bargains.

In addition, "Ullmnan got the home furnishing department, one of the best sources of profit, totally in synch with shoppers' desires. JC Penney is the only merchant that can claim to have strengthening sales in that lucrative category," Cramer said.

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All told, Cramer said JC Penney has become a 'turnaround story.' And Cramer thinks recent confirm his optimism.

Although Penney's still reported a loss for the quarter, Cramer says what matters more is that comparable store sales came in at 6.2%, above consensus expectations of 4% growth for the quarter, according to Thomson Reuters.

In other words, customers have returned.

Also, JC Penney's gross margin improved 230 basis points compared to the prior year's quarter.

That suggests the company is operating more profitably.

Given these results, "I think punished shareholders are, at last, going the be rewarded for their perseverance. Now, there are always going to be setbacks in turnarounds. Expect some fits and starts. But I believe JC Penney is coming back."

Call Cramer: 1-800-743-CNBC

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