How J.C. Penney returned from the brink

When J.C. Penney (JCP) ousted CEO Ron Johnson in 2013 following his short, disastrous tenure, some analysts wondered if the struggling 114-year-old retailer was headed for the dustbin, like so many other once-distinguished merchants that failed to keep up with the times.

Turns out history can wait. J.C. Penney is mounting a comeback, luring customers into its stores and giving investors hope that the turnaround can continue.

CEO Marvin Ellison hasn't missed a beat since he succeeded Myron "Mike" Ullman, a former Penney CEO who returned to clean up Johnson's mess and is now chair. Ellison, a veteran of Home Depot (HD), also is winning kudos from Wall Street analysts. He has improved Penney's long-struggling e-commerce business, bolstered its portfolio of brands and overhauled its management team.

"For someone who counts more than 100,000 employees in his charge along with $12 (billion), going on $13 billion in revenues, Mr. Ellison understands the inner workings of his company's culture and operations in less than 18 months at the helm," wrote Neely J.N. Tamminga, an analyst with Piper Jaffray, in a note to clients. Tamminga rates the company's shares as a "buy."

The success of Penney's strategy was evident in its latest earnings report, which surpassed analysts' expectations at a time when larger rivals such as Walmart (WMT) disappointed investors. Penney also reported a 4.1 percent gain in the key retail metric of same-store sales, which tracks activity at locations open year or more, its ninth straight increase.

In Wall Street's eyes, the retailer's gain compares favorably with the declines seen at rivals such as Walmart and Sears Holdings (SHLD), which has been spiraling downward for years. Penney reduced debt by $500 million in the latest quarter, boosted gross margins and reduced expenses.

J.C. Penney also is managing to do something that not long ago seemed unfathomable: gain market share.

"It's coming from multiple places," said Oliver Chen, an analyst with Cowen & Co., who rates the stock as "neutral." He added that Penney was gaining at the expense of Walmart, Target (TGT), Macy's (M) and Sears, among others.

Still, Penney posted a net loss of $131 million, or 43 cents, in the latest quarter, underscoring the challenges that lie ahead.

"They are not having a party in Texas because the earnings are still negative," said Chen. "You have to give them credit because they have been successful" without a strong e-commerce operation.

Penney, though, is making improvements on its Web business and now can share inventory information with its bricks-and-mortar stores. It also ran a test to allow customers to order merchandise online and pick it up later at physical stores. The effort was a success, and Penney plans to roll out the service at all locations before this year's back-to-school season.

Offering unique brands is an integral part of the strategy. Ullman brought back store brands such as St. John's Bay for women and Okie Dokie for babies that Johnson had angered customers by shelving. The company also has big plans for the Sephora "stores" in its stores. It opened 28 Sephoras in 2015 and expects to open 60 more this year, more than half of them in late April. Penney also plans to offer former New York Giants Hall of Famer and TV host Michael Strahan's fashion line in more stores.

Penney still hasn't fully recovered from the damage suffered under Johnson's reign. Revenue has fallen from $17.26 billion in 2011 to $12.26 billion in 2015, and analysts are expecting $12.97 billion this year.

The company's stock price hasn't recovered either. On the day after Johnson left, the shares traded at $13.93. They closed Tuesday at $10.18, losing a penny despite one of Wall Street's best one-day rallies.

"He did a lot of damage," said Jeff Van Sindren, an analyst with B. Riley & Co., referring to Johnson. "The strategy that he deployed failed, and they've had to rebuild since then." Van Sindren rates the company's shares as a "buy."

At least for now, Penney appears to be putting its worst days behind it.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.