J.C. Penney Company (JCP) , an apparel and home furnishing retailer, has been struggling to rebound since early 2014. Although the stock’s price increased 1.64% to $8.69 per share on July 16, it suffers an overall downside trend from the middle of May 2014. In recent quarters, J.C. Penney has not done well, with a 52-week range from $17.80 to $4.90 per share. Given these major fluctuations, the Plano, Texas-based company now is at a turning point. Each of the company’s actions directly relates to its future.
J.C. Penney operates 1,100 stores around the United States, selling family apparel, home furnishing, and a variety of in-store services such as a styling salon, portrait photography, and custom decorating. With a market cap of $2.62 billion, J.C. Penney still has a robust average trading volume of 17.81 million. The company’s ROE is negative 51.50%, vastly lower than the industry’s average of 15.2%. Though plummeting in the early 2014, J.C. Penney had a pretty satisfying financial report for Q1 of fiscal 2014, which has led a sign of rebounding.
So, with new (old) leadership in place, is J.C. Penney past the worst of it? Is the stock ready to rebound from the lows it was driven to by a truly abysmal year? Or is this just a stop on the long train-ride to obsolescence and liquidation? There’s plenty of arguments for and against investing in this stock, let’s take a look at a few.
Chances To Get More Pennies: The Bull Case
The financial results for Q1 of fiscal 2014 J.C. Penney released in May were quite solid, demonstrating the company has done well in the process of its turnaround. In order to deal with the unfavorable situation, J.C. Penney’s Board of Directors approved a three-stages project since December 2013. The first two steps include stabilization and rebuilding, meaning the company would strengthen its management team, stabilizing the company operationally and financially, and rebuild the business structure.
“During this phase we’re focused on refining our merchandizing and marketing strategies and are to steadily grow sales and significantly improve gross margins while continuing to tighten and manage our expenses, all with an eye toward returning to profitable growth,” said CEO Mike Ullman at a conference call meeting.
According to the financial report, J.C. Penney’s self-rescue project has been effective so far. The company’s net sales in Q1 of fiscal had a year-over-year increase of 5.71% from $2.64 billion to $2.80 billion. Same store sales increased 6.2% and improved sequentially each month within the quarter. Growing sales allow the company to leverage fixed costs on a growing expansion beyond cost cutting. SG&A expenses for Q1 decreased approximately 36.0% to $1.01 billion, primarily driven by lower corporate support costs, advertising, and improved credit income. Among those highlights, the gross margin of 33.1% can be considered as a strong sign of rebound. Comparing with the gross margin of 30.8% for Q1 of fiscal 2013, the current one represents a 230 basis point improvement. The growth in gross margin leaves J.C. Penney more room to achieve its 2014 full-year guidance, comparing with that of 29.4% for fiscal 2013.
Currently, J.C. Penney is at the third stage of the improvement project, which is called “go-forward phase”. During this phase, the company aims to position itself for long-term profitable growth. To achieve the goal, J.C. Penney announced on June 23 that it closed its new $2.35 billion asset-based senior secured credit facility, comprised of a $1.85 billion revolving line of credit and a $500 million term loan.
The new facility replaces a $1.85 billion credit facility that was scheduled to mature in April 2016 and provides better pricing terms than the previous facility. Furthermore, revenues from the term loan will be used to pay down the cash borrowing on the previous facility. The revolving line of credit will be available for working capital and general corporate purposes, according to the company’s announcement. Such an action will likely provide J.C. Penney with more cash flexibility.
Be Aware of Risk Factors: The Bear Cases
In spite of the bullish signals above, negative factors; including a weakening apparel market, fierce competition, and little room for mistakes; lie in wait for J.C. Penney. The U.S. apparel market has been weakening as the harsh winter and the growth of e-commerce, and many branded clothing retailers have let their shareholders down.
Like Equities.com’s Jacob Harper wrote, stockholders in American Apparel (APP) have been hammered. The struggles of American Apparel could be attributed to many reasons, like management problems or the weak marketing background. With a similar product portfolio, J.C. Penney has to face the same disappointing situation.
In the meantime, other industry rivals compete with J.C. Penney for the shrinking market share. Macy’s (M) and Kohl’s (KSS) , national brand apparel retailers, have been seeking ways to beat J.C. Penney.
In June, J.C. Penney got involved a lawsuit with Macy’s Inc. and Martha Stewart Living Omnimedia Inc. (MSO) . Macy’s sued J.C. Penney in 2012 for breaching its own contract with Martha Stewart Living, which included exclusive rights to sell cookware, bedding, and bath products from the company named for the homemaking doyenne. Unluckily for J.C. Penney, Macy’s partially won the court fight. Though J.C. Penney will not pay any punitive damages to Macy’s, the company has planned to fight back through mulling an appeal.
Turnarounds are always difficult, especially in such an aggressively competitive business as apparel retailing. J.C. Penney’s operating income for Q1 was a loss of $247 million, and a net loss of $352 million. Though the company is heading the right direction, it’s still losing money, leaving J.C. Penney little room for mistakes.
J.C. Penney has been working hard to keep its market position and defending its shareholders’ interests. The company is on a path full of risks, though the company has an optimistic outlook for the full fiscal 2014. Investors who may want to buy J.C. Penney needs to be aware of the bearishness.