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J.C. Penney’s turnaround plan uses Home Depot’s blueprints

August 30, 2016 12:19 PM
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(Bloomberg)—J.C. Penney's been collecting a lot of accolades lately. It expects to notch $1 billion in profits this year for the first time since 2012, while continuing to pay down billions in debt. And its stock has surged 50% so far this year, making it one of retail's top performers.

Not bad for a department store once left for dead, where phase one of a four-part turnaround plan was simply, "save the company," CEO Marvin Ellison noted when he outlined J.C. Penney Co. Inc.'s strategy during its analyst day earlier this month.

Ellison did a good job anchoring investor expectations, saying his overriding objective is not to return J.C. Penney, No. 33 in the Internet Retailer Top 500 Guide, to the $19 billion in annual revenue it made in 2007, when its stock traded at $87 a share. Rather, he intends to return the company to growth through sales-boosting initiatives in beauty products, appliances and home goods. That will help it take share from some even worse-performing competitors, such as Sears Holdings Corp. (No. 14 in the Top 500) and Macy's (No. 6), says Bloomberg Intelligence analyst Poonam Goyal.

But the most telling thing to come out of J.C. Penney's day-long presentation was just how much Ellison's playbook mirrored that of his former employer, The Home Depot Inc. (No. 7).

Ellison lost out in a three-way race to become CEO at Home Depot. But during his 12 years there, he helped forge one of the most successful turnaround projects in retail history. Home Depot had been battered by the 2008 housing collapse, underinvestment in technology and store operations, and executive mismanagement that demoralized employees and customers. It completely transformed its business by halting store expansion, shedding unprofitable businesses and focusing on growth areas such as e-commerce and private brands. 

Now Ellison is looking to apply the same toolkit to J.C. Penney. In some cases, he's using the same plays word-for-word. 

Take his 60-40 plan—to shift 60% of an employee's time to helping customers and away from back-room tasks like stocking merchandise. The red-and-gray slide below, from a J.C. Penney presentation earlier this month, hits the same note as one Home Depot included in a similar presentation back in 2013. Both presentations were given by Joe McFarland, a 20-year Home Depot veteran, who now runs J.C. Penney's stores.

Ditto for "Project Simple," a plan Ellison spearheaded at Home Depot to lessen the load on store managers by reducing the amount of corporate emails they receive. He's implementing the same project at J.C. Penney, under the same name.

Ellison suggests the things that worked for Home Depot over the past decade—no new stores, growth through private brands, turbocharging e-commerce and efficient worker communication—can also help refashion J.C. Penney.

Detractors might deride Ellison's lack of creativity. Or they could point to Apple store mastermind Ron Johnson, another chief executive at J.C. Penney who famously tried to take his previous employer's strategy and ram it through at J.C. Penney. It was an epic fail.

But Ellison seems to have learned from many of Johnson's missteps: He tests things before implementing them chain-wide, for one. He's more focused on rejiggering operations to work better for customers attracted to J.C. Penney's value-oriented heritage, rather than trying to turn the chain into some kind of Apple store wannabe.

Wall Street analysts have a stock-price target for J.C. Penney of around $12, on average, according to Bloomberg data, or up 27% from Monday's close. They may not be optimistic enough. Competitors Kohl's Corp. (No. 19) and Macy's trade at around 13 times forward earnings. Applying that multiple to J.C. Penney, which is expected to notch earnings of $1.26 a share in 2018, gives you a stock price of $16—or a 60% upside over two years.

 

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