J.C. Penney's 'Turnaround'

This article has been updated from 7:42 am ET with new information.

NEW YORK ( TheStreet) - J.C. Penney's ( JCP) dismal second-quarter results don't suggest the company is on the mend. However, is the department store chain really doomed?

Retail and turnaround experts make the case for J.C. Penney's comeback.

"The company still has brand equity among its core consumer,"says Michael Appel, president of Appel Associates, a turnaround and performance improvement consulting firm. "The big issue is going to be whether they the amount of capital necessary to buy the time to fix the business. And that's always the issue with these businesses."

Appel believes that although J.C. Penney has tough competition, there's nothing to suggest the company can't right itself. "In the moderate price point there's so much competition," Appel said. "That doesn't mean with the right management and the right strategy and positioning and right product they can't do it."

Also see: J.C. Penney Reports Wider-Than-Expected Loss

J.C. Penney reported a worse-than-expected net loss of $586 million, or $2.66 a share, chock full of extraordinary charges pulling the number down. Net sales slumped 12% year-over-year, and gross margin fell to 29.6% in the quarter. The company plans to end the year with $1.5 billion of cash.

CEO Myron 'Mike' Ullman noted on the company's earnings call that the reversal of initiatives by its former chief executive Ron Johnson will take time - and money. Essentially reversing initiatives to reinstate things like sales and promotions instead of the everyday pricing, clearly identifiable staff and checkout stations as well as a newly launched home section that already was not resonating well with customers and needs modification all requires investment.

J.C. Penney on Thursday said that it adopted a stockholder rights plan in hopes to make it more difficult for anyone to acquire or own more than 10% of the company. The plan, which has a term of one year, is designed to "protect against any potential future use of coercive or abusive takeover techniques and to help ensure that the company's stockholders are not deprived of the opportunity to realize the full and fair value of their investment."

Along with the plan, the company's board of directors declared a dividend of one right for each share of the company's common stock held by shareholders as of the close of business on September 3, 2013. The rights will be exercisable only if a person or group becomes an "acquiring person" by purchasing or owning 10% or more of the common stock.

Despite the bleakness, within the numbers there was improvement, suggesting early signs that the ship is being righted. Comparable store sales improved by 470 basis points from the prior quarter. Sales improved each month in the second-quarter, and the company was seeing encouraging momentum in its stores from back-to-school related purchases.

On the e-commerce front, sales also sequentially improved with July sales jumped 14% over last year, the company said. Selling general and administrative expenses fell slightly over 2% year-over-year to $1.02 billion.

"To summarize where the company is today, we know where the problems are," Ullman said. "We know how to address them, and we have the right plans in place to do the job successfully and get back on a path to return to profitable growth."

Shares reacted positively on Tuesday, following the earnings release and call, rising 6% to close at $14.01. However, the stock is down 14% over the past month and fell an additional 4.9% on Wednesday to close at $13.33.

The two-day rollercoaster of the stock is just another example of J.C. Penney's struggles both in its stores and in the boardroom. The company recently went through a very public battle with its largest shareholder, Bill Ackman of Pershing Square Capital Management, who sought to shake things up at the board and executive levels to get the company's turnaround moving faster. Ultimately, Ackman lost that battle and resigned his board seat.

Ackman recently signed an agreement with the company to start selling his 18% stake in the retailer in the coming months.

Conversely, the company's announcement Thursday of the shareholder rights plan was "not adopted in response to any effort to acquire control of the company." The plan will expire on August 20, 2014, unless the rights are redeemed or exchanged for shares of common stock by the company on an earlier date, a release said.

Also see: J.C.Penney, Ackman Enter Agreement To Sell Stake

Ackman selling his very large stake will make owning shares a rocky road in the near to mid-term, but with heavy hitters like George Soros and now Kyle Bass' Hayman Capital owning stakes in the company, is a bet for a turnaround really so out of the question?

"The biggest problem for J.C. Penney was changing the business model so quickly," says Tom Shinick, an associate visiting professor of marketing for Adelphi and CEO of Corporate Development Partners. "You do not do that."

Ullman is "going back to the business of finding out what the customers want and they're coming back into the store," Shinick says. "In the short term it's going to cost him some money, but in doing that -- and you don't see it in the second quarter -- but I really believe you are going to be seeing it in the next quarter and following quarter. People will be coming back."

Experts say that J.C. Penney needs to focus on its core customer, but also find ways to attract newer, younger customers.

"They have to really work on a positioning that resonates with that consumer and it's probably somewhere between where Ron Johnson wanted to go and where they were before," Appel says. "To be more relevant. To be more updated in their assortment so that consumers find a store an interesting place to shop and having a pricing matrix that the customer" appreciates.

"Everyone's always talking about getting a younger customer, but I also think first they need to do a much better job of serving its core customer group," he adds. "It's a lot easier to re-activate customers."

Still the company certainly has quite an uphill battle to win. Besides reversing what previous management put in place, then J.C. Penney is back to the problem of how to win Middle America customers against competitors like Wal-Mart ( WMT), Target ( TGT), Macy's ( M) and Kohl's ( KSS).

"Long-term, they're in a big fight," says retail consultant Jan Rogers Kniffen.

"When I went into the business there were over 100 department stores literally ... That game is over," he says. "Macy's won the game. Kohl's won the game. J.C. Penney could be a part of that, but do we really need another department store?"

J.C. Penney is bringing back once-popular private-label and national brand merchandise as well as exclusive brands and new partnerships, for instance Disney ( DIS) shops that will open in the kids' section starting in October, Ullman said. It's also looking to e-commerce for a boost that Ullman said "popped almost immediately" following the company's realignment of merchandise online to match in-store selections.

Of course, J.C. Penney's biggest test will be whether it can show significant improvement results during this year's holiday season.

J.C. Penney plans to be "a primary destination" for Black Friday and Cyber Monday, Ullman said.

Some say it's too big a fight to win.

"We believe JCP has been burned by the effects of a failed turnaround strategy, which has created a hole that is just too deep," Wells Fargo Securities analyst Paul Lejuez writes in a research note on Wednesday. Lejuez rates the company at "underperform."

"For JCP to get back to break-even from an EPS perspective, they would have to recover 75% of its lost sales (from FY2011), achieve gross margin of 37%, and not spend another SG&A dollar vs. FY2012 levels, and there is no telling how long it could take," the note cautions. "While liquidity is not an immediate issue, the company may need additional liquidity in FY2014 if business does not turn sharply."

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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