Recent steps by J.C. Penney ( JCP) and Target ( TGT) to hive off noncore assets are the retail sector's latest symptoms of Wal-Mart ( WMT) disease. The operations being cut loose aren't alike. Penney's Eckerd unit is a chronically underperforming drugstore franchise whose margins were flattened by cutthroat competition, while Target's Mervyn's and Marshall Field's divisions have seen their high-end offerings fall out of favor with hurried bargain-hunters. But with each divestiture, the parents are leaving behind disadvantages that exist at least partially because of Wal-Mart, the country's biggest retailer. The moves were both motivated because "the consumer is more interested in getting the most bang for their buck," said Adrian Bachman, a portfolio manager at Rydex. At J.C. Penney, keeping a hand in the drugstore space made no sense, given larger competitors that could offer much more than just drugs and cosmetics at a single outlet. Meanwhile, Target has seen profit and sales stumble and growth disappear at its department store chains. Analysts generally expect both stand-alone J.C. Penney and Target stores to succeed as separate entities from the divisions that were holding them down. "Target is more in an offensive position, whereas J.C. Penney is in a defensive position," Bachman added.
The 'Turnaround of the Decade'
A stripped-down J.C. Penney may be up for the fight, according to Richard Hastings, an analyst at Bernard Sands, citing its ability to adapt to changing consumer tastes quickly. "The stores look good, and the online performance is rated very high," he said. "They're starting to perform well across a wide variety of performance measures. ... People like the quality and variety and the very contemporary styles that J.C. Penney offers." Merrill Lynch analyst Dan Barry called J.C. Penney the "turnaround of the decade." He said the company's new centralized distribution center will contribute to stronger gross margins. "Centralized decision-making allows Penney's buyers to act more swiftly to respond to fashion trends and good buying opportunities," he said.