Stocks to Watch in the Retail Sector: J C Penney Company Inc (JCP) and Best Buy Co Inc (BBY)
As the holiday season is reaching its peak, investors would be pondering over as to which stock to buy. It is not an easy task because some of the bigwigs like Wal-Mart Stores, Inc. (NYSE:WMT) or Amazon.com, Inc. (NASDAQ:AMZN) may take away the lion’s share of the total spending in the season. However, two companies to closely watch areJ C Penney Company Inc (NYSE:JCP), which is in the process of turning around, and Best Buy Co Inc (NYSE:BBY), which is witnessing strong sales of Apple Inc. (NASDAQ:AAPL)’s Apple Watch. The two companies are set to take advantage of the 3.7% growth estimated by the National Retail Federation during the holiday season.
As far as J C Penney Company Inc (NYSE:JCP) is concerned, there are few favorable factors that would help to satisfy investors. For instance, expectations on EPS have come down among the Street analysts. Earlier, the consensus called for the company to deliver EPS of 31 cents for the fourth quarter three months ago. Currently, they expect the retailer to report EPS of 24 cents for the fourth quarter. Considering that the company reported only break-even in the previous year, the expectation is significant even if it meant slashing from the earlier levels. In the last three quarters, its bottom line topped the Street analysts’ expectations between 14.5% and 25.0%.
Another factor was that J C Penney Company Inc (NYSE:JCP) reported a 6.4% growth in its same store sales for the third quarter. It was driven by positive gains across its merchandise divisions like Sephora, Handbags, Men’s, Footwear, and Home. Geographically too, the company did well to record growth with the significant performance in the western, as well as, southern regions. Also, the company’s efforts to improve its margins were paying off. For instance, its gross margin improved by 70 basis points on top of 7.1 percentage points recorded in the previous year quarter. This was an important factor considering that retailers were offering generous discounts to lure more customers. The retailer was cautious about its operating expenses, which is falling currently.
Profitability Seen In FY17
As J C Penney Company Inc (NYSE:JCP)’s losses were growing, the company had to borrow resulting in increased interest expenses. The company is likely to close the year with free cash flow at break-even rates. Once the retailer starts getting into the profitability mode, it might resort to reducing its debt burden resulting in lower interest costs. Already, the company is experiencing gains from gross margins, as well as, operating margins. For the full year, the retailer expects gross margin enhancement of a minimum one percentage point and a maximum of 1.5 percentage points. Similarly, it is expected to gain $120 million from the operating expenses due to its strict discipline. Also, the company expects 4 – 5% comparable store sales for the full year.
J C Penney Company Inc (NYSE:JCP) is also likely to boost its investments in e-commerce next year while slowing its focus on square footage growth trend in 2016. Currently, consumers are better placed to spend as the gasoline prices witnessed a sharp decline in the last one-year period. While the company might suffer a loss next year, Nomura expects the retailer to post a profit in the following year by reporting 35 cents a share. The brokerage has earlier predicted the retailer to post break-even in 2017. The upward revision suggested the optimism in the turnaround efforts yielding results in the coming years, i.e. ahead of earlier estimation.
Seller Of Top Brands
One of the recent happenings in Best Buy Co Inc (NYSE:BBY) was the extension of Apple Inc. (NASDAQ:AAPL)’s products. The company gained significantly from the sale of Apple Watch in the April and June quarters. As a result, its EPS provided positive surprise by 27.6% and 44.1% respectively. Also, the retailer is increasingly focusing on top brands like SAMSUNG ELECT LTD(F) (ADR) (OTCMKTS:SSNLF), Alphabet Inc (NASDAQ:GOOGL), Microsoft Corporation (NASDAQ:MSFT), and Sony Corp (ADR) (NYSE:SNE). As a result, the possibility of these companies sharing the remodeling cost of its stores could not be ruled out. The retailer has already indicated that it would start selling more Apple brands from more number of stores and was remodeling for that purpose.
The hotlist among the shoppers are electronic items and Best Buy Co Inc (NYSE:BBY) fulfills it by offering big discounts. Recently, the retailer slashed $100 per Apple Watch to $599 from $699 apart from offering free shipping. The company has also offered a similar discount for iPhone 6S Plus with activation on either Verizon Communications Inc. (NYSE:VZ) or Sprint Corp (NYSE:S) for two years. It would also be selling Apple TV this season. Also, the bankruptcy of RadioShack should help the retailer due to less competitive activities since it was one of the top ten electronics retailers.
Currently, Best Buy Co Inc (NYSE:BBY) stock price might suggest that it was fairly priced due to its PE ratio in the range of 13 – 15 versus the overall market’s 20. The company is one of the selected few to sell Apple brands, and that holds the key to delivering strong numbers in the current quarter. Also, the current levels make it less risk to invest for long-term gains. Analysts’ have consensus price target of $41, which means there is enough space for upside rewards.
J C Penney Company Inc (NYSE:JCP) and Best Buy Co Inc (NYSE:BBY) falls under the different category. While JCP is turning around with its consistent performance in the last few quarters, BBY is strengthening its position in the electronics items, and Apple products fits perfectly with its scheme of things. The company is well aware of Amazon.com, Inc. (NASDAQ:AMZN) and takes enough step to ensure its share. The holiday season provides an opportunity for everyone. However, those who take additional steps stand to gain and the bets can be placed on these two firms.
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.
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