Is J C Penney Company Inc (NYSE:JCP) Out Of The Woods?
In the recent times, J C Penney Company Inc (NYSE:JCP)’s turnaround has focused primarily on the expansion of the Sephora in-store concept to more locations and the inclusion of more private label merchandise. Moreover, stores are being renovated and remodeled to make them more attractive to the eye and simplify discovery and selection of items by customers.
However, despite the spirited efforts to transform J C Penney, unfavorable macroeconomic shifts, competition and a bloated debt position continue to threaten the turnaround.
Is J C Penney out of the woods? A look at the recent financial performs gives the impression that things are improving, but the retailer is not yet on solid ground. The important question that investors should be asking is whether management is doing enough to restore the company back to its former glory characterized by fast-growth and profitability. This article looks at that, but first is a quick recap of the latest quarter earnings.
J C Penney Company Inc (NYSE:JCP)’s 4Q2015 adjusted EPS of $0.39 topped the consensus estimate of $0.22 and also rose from a break-even in the prior year. A spike in sales and continued cost curtailment has supported the bottom-line improvement.
4Q2015 comparable store sales rose 4.1% with all the categories including Footwear, Home, Handbags and Sephora registering comp improvements in the quarter. Net sales for the quarter were up 2.6% in the quarter to $3.996 billion, ahead of the consensus estimate of $3.995 billion.
J C Penney is looking for positive adjusted EPS in fiscal 2016, which if attained would be a first in five years. The last time J C Penney posted a positive annual EPS was in 2011. Wall Street is looking for EPS loss of $0.28 for 2016, which suggests that the J C Penney management is more optimistic about the turnaround progress of the company than outsiders.
However, management provided a caution that attaining positive adjusted EPS in 2016 will depend on comparable sales increasing by at least 3% and gross margins improving by at least 40bps.
What’s exciting about J C Penney?
- Cooling store closure
There is a change of mind regarding store closure at J C Penney Company Inc (NYSE:JCP). The CEO, Marvin Ellison, recently said he looked at data and realized that he should keep stores rather than close them. The school of thought is that the company needs the money that the stores generate to help it fund its turnaround. Additionally, Ellison’s executive team has also realized that the stores are important in creating a seamless shopping experience for customers. For example, the retailer can use those stores as fulfillment centers for its e-commerce sales.
As such, J C Penney will only close seven stores this year. That compares with 83 stores it closed in the last three years.
The chart shows the shifts in J C Penney’s store count for the last five years:
- Sephora store within a store concept
As part of its long-term growth strategy, J C Penney has utilized the store within a stores in-store concept headed by Sephora. These are cosmetic-themed sections within J C Penney stores. The initiative has only been rolled out in a small number of locations but the company is planning to rollout it out to more locations.
J C Penney opened 28 Sephora stores in 2015, finishing the year with a portfolio of 518 such stores. This again year it will open 60 new Sephora stores. So far J C Penney has seen that the Sephora concept is working well and wants to accelerate its rollout.
Sephora was one of J C Penney’s best performing categories in the whole of 2015, mostly exceeding expectations as the concept draws the interest of more shoppers, thus boosting other categories of the retailer.
- Seamless shopping experience
J C Penney Company Inc (NYSE:JCP) is in the process of offering its customers a unified shopping experience. The company is currently experimenting with a concept whereby customers shop online and pick up their shopping at a nearby facility the same day. If the strategy proves viable, it will be expanded to include all J C Penney retail network.
J C Penney is moving to implement seamless shopping experience that combines offline and online at time when its digital business is booming, showing remarkable improvement in the recent times.
- Store modernization
J C Penney Company Inc (NYSE:JCP) is working to spruce up its image. Stores are being renovated and remodeled to make them attractive so as to boost store traffic and inspire customers to shop more. The retailer is especially looking to boost sales of its high margin merchandise such as sunglasses, handbags, fashion jewelry and other fashion accessories.
In addition to store optimization, J C Penney is also inviting shoppers to its stores with promotion offers such as an assortment of private label items that can be bought for just a penny. Such promotions are both directing traffic to J C Penney stores and fueling sales at the same time.
Beyond Sephora, J C Penney also has some other store-within-a-store concepts such as Disney Baby.
What’s worrying about J C Penney?
- Highly leveraged balance sheet
J C Penney Company Inc (NYSE:JCP) is trying to reduce its debt level, but its balance sheet still reflects a large debt position. It finished 2015 with $4.8 billion in debt. Management did a great job in 2015 reducing debt. In 2016, the management is targeting to reduce debt level by between $400 and $500 million.
- Unfavorable economic shifts
Like all other retailers, J C Penney’s business depends on consumer purchasing power. When consumers have enough discretionary income, J C Penney celebrates it because traffic to its stores and sales tend to go up. When unemployment levels are high, costs of fuel pikes and access to credit becomes limited, the retailer feels the pinch as customers keep off stores.
Unfortunately, these macroeconomic shifts are difficult to predict, but when the strike, the impact can be devastating to a business that is just struggling to regain its footing.
J C Penney Company Inc (NYSE:JCP) has to juggle between transforming its business and staving off competitive pressure.Intense competition poses many risks including hurried execution that can hurt catastrophic and high spending on marketing campaigns that can hurt margins in the end.
J C Penney Company Inc (NYSE:JCP) is not out of the woods yet, but it is also not on the brink. The initiatives that the management is working have the potential to bring back the retailer to solid grounds when executed properly.
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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