J C Penney Company Inc (JCP) Is Turning Around And Recent Results Prove It

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J C Penney Company Inc (NYSE:JCP) seems to be showing life of late. The company’s second quarter results that topped the expectations have boosted the sentiments undoubtedly. The company’s shares occupy the top holding slot in at least two hedge funds. Some analysts started liking the stock after the second quarter results. What made them like the stock? Whatever reasons they might provide, one thing is definite. The company is showing signs of revival as the force to reckon with again through reorganization or re-positioning. Therefore, there is less risk in holding the stock.

Turn Around Process Gaining Momentum

Credit should be given to the management of J C Penney Company Inc (NYSE:JCP) for turning it around. It was not an easy task under the tough competitive environment. The company is also ready to shed their margins to gain business. For instance, the retailer’s comparable store sales plummeted 17.0% in the first quarter of 2013. Throughout the year, the retailer struggled to record comparable store sales growth. As a result, its comps dipped 7.4% for the full year. It could have been much more but for the 1.4% uptick in the fourth quarter of the same year.

However, the following year of 2014 proved to be a better one for the chain. J C Penney Company Inc (NYSE:JCP) registered 7.4% growth in the first quarter and 4.4% in the fourth quarter. That resulted in annual growth of 4.4% in 2014. In the current year’s two quarters, the company’s comparable store sales were 3.4% and 4.1% respectively for the first and second quarters. If the strong growth in the year 2014 was due to the significant weakness in the preceding year, the current year’s uptick is not just by any fluke or any chance. It has come through the efforts made in the last few years. One of the reasons for its turnaround is that it has come back to promotions that the company’s customers have favored. Another point is the focus on e-commerce sales.

Key Takeaways From Second Quarter Results

Apart from the comps, J C Penney Company Inc (NYSE:JCP) delivered other numbers suggesting that its turnaround process is showing improvements. The company’s gross margin enhanced by one percentage point, to 37.0%, in the second quarter, driven by enhanced clearance, as well as selling margin performance. Sequentially too, margins improved by 60 basis points. The strong improvements can be seen when its margin rate was only 30.8% in the first quarter of the year 2013 and the full year margin rate was 29.4%. However, the retailer could post improved margins to 34.8% in the next year of 2014. The company could see reduced shortage levels and improved private brands performance delivering key value items in the second quarter. The key to the enhanced results are favorable transaction counts, men’s apparel, Sephora business, and strong private brand results.

Other key metrics are the selling, general, and administrative costs. J C Penney Company Inc (NYSE:JCP) has spent 40.9% of its total revenue for S, G&A in the first quarter of the year 2013 and 34.7% for the full year. The company did well to control its expenses to 32.6% in the whole of the year 2014. In the current year’s first and second quarters, S, G,&A accounted for 34.4% and 31.3% respectively of the overall revenue. Similarly, the retailer’s EBITDA was a minus 13.3% in the first quarter of the year 2013 and minus 6.9% the whole of the year. However, in the next year, EBITDA turned into positive 2.6%. The first two quarters recorded 3.2% and 4.0% respectively.

EBITDA Outlook Boosted

J C Penney Company Inc (NYSE:JCP) should have been satisfied with the first half results. That’s why the company boosted its EBITDA forecast to $620 million for the current year, from $600 million. The company is now expecting comparable store sales to grow 4.5% in the current fiscal year, compared to 4.4% uptick achieved last year. Similarly, the retailer expects gross margins to be more than 1 – 1.5% over the last year, while expecting scope for $120 million reduction in S, G&A. The company expects break-even in free cash flow. For the years 2016 and 2017, the company is aiming to achieve EBITDA of $900 million and $1.2 billion respectively.

As part of the retailer’s customer proposition, J C Penney Company Inc (NYSE:JCP) intends to offer private brands with quality, value and compelling style, apart from the most desired national brands. The company also offers exclusive and different attractions, like Disney and Sephora. The retailer is planning to provide seamless and convenient Omnichannel shopping and focus on associates who deliver a winning customer experience.

Analyst Comments

B Riley initiated J C Penney Company Inc (NYSE:JCP) with a rating of Buy and set a price objective of $12.50 on the company’s shares. The brokerage said that the company is on the road to recovery by pointing out key metrics showing improvements. Also critical to its thinking of the company’s future are the omnichannel development efforts re-accelerated with the re-integration of online, as well as stores. It still has the competitive advantage in the catalog business.

Conclusion

One of the reasons why the stock is liked by an increasing number of investors is the risk/reward profile due to the signs of a turnaround. Also, the expectations remain low and easy to exceed for J C Penney Company Inc (NYSE:JCP). With the turnaround efforts in place, it will not be tough for the retailer to beat expectations. All the key metrics are looking good and the conditions are favorable, like the growing economy. The weaker oil price should enable the consumers to spend a little more freely. Therefore, the turnaround should gain accelerated momentum in the coming quarters.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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