News reports are coming out this morning that J.C. Penney (JCP) is set to buy a 17% stake in Martha Stewart Living Omnimedia (MSO) for $38.5 million. Not only is this Ron Johnson’s first big step as CEO, it also sheds light on his strategy with the retailer now that he has moved on from Apple to a different kind of retailing operation. There is no doubt that Johnson will be focusing on brands and how to get the best assortment of products in his stores to attract more traffic. He has always said that the reason Apple stores are successful is less about the design of the store and more about the actual products they offer.
Martha Stewart is the perfect candidate for JCP given her mass following. And the fact that her company doesn’t make a profit makes for a relatively cheap investment (less than $40 million is peanuts for a multi-billion dollar retailer). A stronger relationship with Martha Stewart should yield huge returns on this small monetary investment.
Ron Johnson’s track record building out the Apple store concept makes JCP an interesting stock to watch. Given the current price in the low 30’s and the fact that a revamp of the company’s stores is likely to take a lot of time as well as a lot of money, I would not expect financial results to accelerate quickly. This is likely more of a 2013-2014 story from an earnings and sales perspective (not 2012).
In fact, hints of increased corporate expenses as Johnson implements his plan could pressure earnings short term and cause a negative reaction on the company’s shares. At that point, investors might want to take a strong look at the stock if the price is right. In the mid to high 20’s I would be intrigued (the stock closed yesterday at around $33).
Full Disclosure: No position in JCP at the time of writing, but positions may change at any time.