Monday, January 27, 2014

J.C. Penney Company, Inc. (JCP): Can JCPenney Sustain Investor Confidence?

Troubled retailer J.C. Penney Company, Inc. (NYSE:JCP) has provided some relief to its investors by saying it saw improved sales trends in September and expects this to continue throughout the remainder of the year. Further, the company expects to end the year with more than $2 billion in cash, sending the stock higher by 7 percent.

The vital question is can JCPenney continue in the same vein and sustain investor confidence amid a tough retail climate and government shutdown.

First things first; the recent equity raise should dilute the fiscal 2014 EPS by about 50 cents. Last week, JCPenney closed a public offering of 84 million shares of common stock that generated approximately $785 million in net cash proceeds.

It may need to raise further cash next year to boost the liquidity, and the skeptics remain concerned about the slower-than-expected recovery in JCPenney's key operational metrics including same store sales, gross margins and cash flow.

Sterne Agee analyst Charles Grom echoed similar thoughts in his client note saying that former CEO Ron Johnson may have permanently turned off the retailer's core customer. Groms downgraded the stock to "hold" from "buy."

The company ended the second quarter with cash and cash equivalents of $1.53 billion and $1.4 billion in untapped liquidity on its revolving line of credit, including the accordion feature.

A series of internal missteps left JCPenney in a more challenged spot near term. Former CEO Ron Johnson's tactics of removing discounts and overhaul the chain's inventory resulted in a $1 billion loss and a 20 percent plus drop in sales in his first full year on the job. No wonder, he was ousted after 17 months..

Now, Myron Ullman, the current Chief Executive Officer of JCPenney, said, reconnecting with its customers and getting them into stores is a top priority for the company.

Gross margins continue to be impacted by lower clearance margins due to the overhang of inventory from the first two quarters of t! he year, higher levels of clearance units sold during the period, as well as the company's transition back to a promotional pricing strategy during the second quarter of 2013.

At the current level of expenses, the company's gross margin dollars are not enough to cover its expenses, and in order for the company to escape from its seemingly ongoing losses, it will have to rebound its sales to a level that will expense leverage.

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Though traffic trends have improved during the quarter, including positive off-mall traffic for the last two weeks of September, the company's mall-based stores continues to be difficult.

JCPenney is still trying to fix its Home department as the company admitted that getting the new Home strategy up and running has been more challenging than originally planned. To date, the company has re-opened all but a handful of its 505 new Home departments.

Merchandise assortment, shopping environment and price points have not resonated with customers, and sales trends remain weaker in stores. Importantly, hard home goods is an inventory category that takes a lot of time to clear—even with aggressive couponing—which could create a margin overhang for several more quarters.

JCPenney is working hard to create a more balanced assortment between modern and traditional home furnishings, with opening price points and an easy shopping environment.

The company is pursuing a number of strategic initiatives in order to continue driving improved performance. With its renewed focus on putting the customer first, JCPenney is rebuilding its base of highly satisfied and loyal customers. Customer service scores are at all-time highs for the company.

Private brands and basics are an integral - and profitable - part of the company's strategy. Private brands, such as St. John's Bay, Arizona and Stafford, and key item basics hav! e been re! stored to inventory levels sufficient to meet customer demand heading into the critical Holiday season.

One of the key positives in the company's statement is that remains current in its payments to vendors. This indicates that the company is continuing to make progress in its turnaround.

September comparable store sales, a key metric to gauge retail performance, were down 4 percent from last year but rose 580 basis points from August 2013.

The company's online sales continue to trend double digits ahead of last year, and are up 18.6 percent in the third quarter to date. September sales on experienced 25.3 percent sales growth over the same period last year. Women's apparel, the company's largest business, reported positive sales for the month of September.

JCPenney should post improved sales numbers for the key holiday season and report strong margins and cash flow to sustain the confidence of the investors; although, it is not easy amid tough competition and  weak retail environment.

"Although there remains significant work to be done, the experience, talent and drive of our team is allowing us to confront our challenges head on and take swift and effective actions to address them. It will take time, but we are on the right path with a sound strategy and achievable goals," Ullman said.

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