J.C. Penney's Store Closures Don't Address the Real Problem

Desperate yet dedicated to its long-term profitability, J.C. Penney (JCPN.Q) recently announced the next step of its turnaround strategy. The troubled department-store retailer stated that by May, it plans to close 33 of its 1,100 remaining stores and cut 2,000 jobs. The news did not sit well with investors, sending share prices falling by 1.1% after market close Wednesday, Jan. 15.

J.C. Penney's senior management has since stated that these moves need to take place for the company to turn its losses into profits and streamline its long-term future. For Foolish investors the question is, of course, if these store closures will be enough to send sales and net profits soaring once again.

Getting rid of the worst of a bad bunch
Although same-store sales losses have gradually slowed over the first nine months of fiscal 2013 from the fiscal 2012 period, J.C. Penney is still losing hundreds of millions of dollars every quarter due to a lack of sales in an absolute sense. The key is getting customers in the door and then worrying about encouraging customers to make purchases. After all, promotions and product offerings matter little if there is no one shopping in its stores. This has been THE major issue for J.C. Penney in recent years:

Making small, steady improvements
Based on the above year-over-year same-store sales figures, it is likely that J.C. Penney will also improve same-store sales in the fourth quarter compared to a year ago. However, this latest announcement of store closures and layoffs has Wall Street analysts and regular investors concerned that J.C. Penney's sales in the fourth quarter were not as high as expected, thus making the announced store closures was not only too little, too late but a vain attempt to cater to investors.

To make matters even worse for investors, J.C. Penney has yet to offer any sales numbers for December despite announcing sales figures for both October and November in a timely manner. This begs the question, "Did sales drop in December?" According to CBS News, "The holiday season is crucial, since it can account for anywhere from 20[%] to 40[%] of a retailer's annual sales. But at J.C. Penney, the stakes are higher." Hopefully, for J.C. Penney shareholders, no news is good news.

Unlikely to solve all problems
Over the next several months, J.C. Penney will close 33 of its 1,100 U.S. stores. Throughout this time, J.C. Penney will start marking down prices at these locations. The company's goal is to have everything sold by May. Twenty states will be affected by these closings, with the majority of these stores located in small cities and towns. It is certainly a good thing that these stores are being closed for the organization as a whole. After all, they would not be closing if they were not below-average performers. Not to mention the fact that J.C. Penney will save $65 million a year in operating costs once these stores are closed, which will help its bottom line, but not fix it.

Investors should keep in mind that these stores represent just 3% of the total store count, and while sales per square foot will likely increase slightly thanks to this move, the company's problems are not solved. The unfortunate fact is that J.C. Penney's average sales per square foot, across all 1,100 of its stores, are too low for the company to be profitable. Closing underperforming locations patches a few leaks, but it does not make the ship sail again.

Long-term viability
J.C. Penney's problem has been generating consumer traffic in its stores. For the last three fiscal years, J.C. Penney's sales per square foot have been falling by large amounts, as former customers are turning to other retailers like Macy's (M -2.68%) and Kohl's (KSS 1.49%) to do their shopping. For instance, while J.C. Penney's sales per square foot have been tumbling, Macy's sales per square foot have been on the rise.

 Macy's sales per square foot actually increased by a full $22 between 2010 and 2012, while J.C. Penney's sales took a hit of $38 over the course of just one year. Although Kohl's sales per square foot have declined by almost $10 since FY 2010, its sales remain strong. J.C. Penney needs to figure out a way to attract customers in its doors by possibly redesigning its interior and exterior appearance to catch consumers' attention. Even though these closures will likely help the average numbers, the small amount of cost savings will hardly change the fate of the retailer.

Foolish takeaway
Foolish investors should picture J.C. Penney years from now and the way it may compare to its arch rivals Macy's and Kohl's. Is the retailer honestly capable of transforming itself into a profitable retail giant again? If it does plan to turn its ship around and sail in the right direction, the company needs to change the way the brand is perceived by its target market and get customers back through the doors. Otherwise, there are many more store closures in its future.

Foolish investors would be wise to hold off on making an investment in J.C. Penney until this latest development has been completed, and even then, it may be wise to see what J.C. Penney plans to do after that to save its ship from drowning.