Where Will J.C. Penney Be in 10 Years?

By Markets Fool.com

Just three years ago, J.C. Penney was thought to be on it last legs. Stores were being shuttered, old CEOs were departing while new CEOs were riding in on white horses, and the word bankruptcy was being tossed around on a daily basis when referring to the beleaguered retailer. Despite its woes, J.C. Penney managed to cut costs, alter its course, and slowly but surely earn back the trust of some of the customers it lost. It seems that, at the very least, there is a place for J.C. Penney in retail America today.

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Retail America tomorrow, however, could be an entirely different story. Amazon.com's sales, a bellwether for e-commerce usage, continue to climb every year. Meanwhile, J.C. Penney's top competitor, Macy's , continues to invest in omnichannel and other e-commerce-focused initiatives. Those moves, funded by Macy's massive free cash flow generation, could very well leave JCP in the dust. Given all of this, is it possible that all J.C. Penney's management has earned for the company is a temporary stay of execution?

This J.C. Penney in Brooklyn has a very modern look. Image source: J.C. Penney.

Below, three Motley Fools contributors weigh in to answer the question: Where will J.C. Penney be in 10 years?

Daniel B. Kline (Out of business): My dire prediction is not meant as a knock on the work Mike Ullman did in bringing the company back from the mess Ron Johnson created, nor is it a criticism of current CEO Marvin Ellison. The problem is that while Johnson was clearly the wrong visionary, it's going to take a radical reinvention for nearly any retailer to survive in the coming decade.

J.C. Penney is a lower-priced department store competing in a space already squeezed heavily by the Internet. Going forward, that pressure will only become more intense. Now, at least physical stores have the advantage of people seeing, and trying on, clothes in person before purchasing. That's an advantage for brick-and-mortar stores when it comes to anything wearable. Even in an area like shoes, where someone's size is generally consistent, people hesitate to buy online because of the hassle involved in returning something.

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What happens to a retailer like J.C. Penney when technology makes that much less of a problem? There are already tablet-based apps that help people size clothes. They're not perfect yet, nor are they widespread, but five years from now, who knows?

Remove, or at least reduce, the natural advantages physical stores like J.C. Penney have and all it really has going for it is the occasional shopper in need of an item right there and then. That, too, will become less of an advantage as two-day delivery becomes the default and even faster methods get developed.

J.C. Penney, at least as it currently exists, is simply not special enough to survive the loss of these edges over buying online. It's possible that Ellison plans to finish stabilizing the chain, before attempting a radical reinvention, but that seems unlikely, which leads me to believe this will be a case of a well-managed, slow death.

Rich Duprey (Thriving): Wall Street has been completely unable to accurately forecast J.C. Penney's recovery almost from the time it began. The fact that it has finally gotten on board with the department store chain making good on its promise could be seen as a contrarian indicator, but I think for once, Wall Street has got it right.

It's true that the retail landscape is in the midst of an upheaval, as Amazon has changed the way consumers shop. There's no evidence, however, that shoppers are willing to completely abandon the physical store for the digital. Indeed, Amazon is now in the midst of opening a number of brick-and-mortar locations precisely because customers still want to feel, touch, and experience an item before making a purchase. We're actually seeing this from quite a few Internet retailers that until very recently were online-only, including diamond seller Blue Nile launching a physical "webroom" to hawk its stones; Gap subsidiary Piperlime opening its first store in Soho, New York; and curated commerce service Birchbox experimenting with the model.

Using brick-and-mortar stores as distribution points for e-commerce sales helps blur the distinction between what is considered an online seller and a physical location retailer.

That bodes well for J.C. Penney, which has initiated not only a major transformation of its many shopping mall anchor stores, but a revamp of its online channel aimed at making it just as important a component of its success. In its annual filing with the SEC last month, the retailer credited Internet sales with helping it achieve its goals, noting, "Internet sales grew at a faster rate compared to our department stores and were positively affected by our mobile application that creates an enhanced digital experience."

It has regained market share while rivals like Macy's and Kohl's have stumbled, I foresee J.C. Penney strengthening its position and enjoying even better results than it is now.

Sean O'Reilly (Smaller but profitable): I couldn't agree more with those who say that the golden age of the brick-and-mortar department store is probably behind us. Only a (lower-case) fool can look at the annual march upwards of online sales and not see the writing on the wall. This does not mean, however, that there is no room for the likes of J.C. Penney (or a few of its peers, for that matter) in the 21st century. What J.C. Penney will require to succeed is not a store in every decent-sized city. JCP needs fewer stores, in fewer markets. Of course, each of these locations will need to be carefully stocked, and operate in highly efficient locations that work hand-in-hand with advanced distribution and online sales network.

So, what does all of this mean for the J.C. Penney of 2026? One need only look, I believe, at the current operations and financial statistics of its two worthy peers: Macy's and Dillard's . Macy's has been the leader of the pack for some time now, and while it didn't have the best 2015 holiday season from an operating standpoint, its results speak for themselves. Dillard's, too, seems to succeed by following the K.I.S.S. rule (keep it simple, stupid), and so too will J.C. Penney in the years ahead.

Dillard's operates just under 300 stores spread across 29 states. This lends credibility to the idea that leaner is better, especially when coupled with its decent profitability compared to JCP. Dillard'slarger peers seem to be getting the idea. J.C. Penney has closed, or scheduled for closure, over 100 stores (dropping its location count to 1,062 as of Dec. 31, 2015) as part of its cost-cutting initiatives of the last few years. Macy's, despite its billions in free cash flow and profits every year, actually closed 22 locations in fiscal 2015 while opening just 5 new stores, for a net decrease of 17 stores. All three of these retailers see the writing on the wall. What lies ahead are fewer physical store locations, found primarily in high-traffic, high-population areas, all of which will work hand-in-hand with a modern, e-commerce focused, distribution network. For JCP, specifically, I wouldn't be surprised to see its profits continue upwards, and store count continue downwards, in the decade ahead.

The article Where Will J.C. Penney Be in 10 Years? originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends Blue Nile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.