Photographer: Saul Martinez/Bloomberg

J.C. Penney Missed Out on 3300% Rally as Dumped Asset Surges

  • Renner’s Jose Gallo gets ready to move on after a generation
  • The top-performing retailer sees a smooth transition ahead

J.C. Penney Co. bailed on Brazil more than a decade ago. In hindsight, sticking it out would have been the smarter move.

The market value of Lojas Renner SA, the Brazilian retailer that J.C. Penney divested in 2005 for $230 million, is now $7.9 billion, an increase of more than 3,300 percent. Meanwhile, the iconic American department-store chain has seen its own business founder as U.S. brick-and-mortar outlets buckle under the weight of e-commerce. Penney is now worth just a fraction of its former value.

Working in Renner’s favor is the fact that mall-goers in Brazil have been slower than their U.S. counterparts to alter their shopping habits in the digital age. Renner also eschewed its department-store roots in favor of so-called fast-fashion, a strategy that has helped the retailer ride out Brazil’s years-long recession. Investors have rewarded the company by driving the stock up by almost 150 percent since the start of 2015.

“The markets trust Renner’s management,” said Giovana Scottini, an analyst at Eleven Financial in Sao Paulo. “It’s a company that’s always changing.”

Renner will soon undergo another transformation, perhaps its biggest since being dumped by Penney. Plano, Texas-based Penney didn’t respond to a request for comment.

Chief Executive Officer Jose Gallo, who has led Renner for more than a quarter century, is due to retire when his contract ends in January 2019. While the company declined to say who will take over, whoever it is will face a tough challenge in repeating Renner’s stock rally.

“One of Renner’s biggest challenges is Gallo’s succession,” Scottini said. “The company would need a much steeper growth slope to have an upside from where the shares are at now.”

Price-Earnings

The company is trading at almost 29 times its estimated 12-month earnings. The stock, which closed at 34.60 reais Tuesday, is 18 percent above the average target of analysts. It was down 0.4 percent to 34.45 reais at 12:43 p.m. in Sao Paulo trading.

“Even considering that it is extremely well managed, that they are excellent, remarkable operators, it is just too expensive,” said Bernardo Rodarte, who oversees 1 billion reais ($320 million) at Sita Corretora in Belo Horizonte, Brazil. “I don’t have the courage to buy."

Porto Alegre, Brazil-based Renner is aware of the market’s concerns. It’s spent five years working on a succession plan not just for Gallo, but for all directors and, “without doubt,” it will be a transition of continuity, Gallo said.

“Something good will happen, I’m pretty sure of that, pretty calm about it,” Gallo said in an interview. “We’re betting on the market consolidating and adding square meters.”

Continuity, for Gallo, means an ongoing focus on fast fashion that’s stylish and affordable, with a quick turnaround time to keep up with emerging trends. While Renner carries men’s and children’s clothing, its primary target audience is women, competing with Forever 21 Inc., C&A Group and Inditex SA’s Zara. The company is opening 60 or so stores a year, just launched its first international shop in Uruguay and isn’t considering large acquisitions.

“It’s all about value proposition,” said Gallo, who will stay on as a board member. “We have the right one.”

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