Past Performance: J.C. Penney has missed expectations the last four quarters. They haven't just missed by a penny or two either, JC Penny (JCP) has missed big. In the first quarter of 2012, JCP reported a loss of $0.25 per share and are expected to report a loss of $0.57 per share in the first quarter of 2013. Ron Johnson, the CEO of JCP, has been on the job for less than two years. It has been a massive undertaking to turn around this troubled retailer, and this quarter may have repercussions on Ron Johnson's job status if JCP doesn't at least report earnings close to expectations.
Fundamentals: Currently, the fundamentals aren't looking too promising for the retailer. J.C. Penney has a P/E of -4.1, a Forward P/E of -10.7, a P/S of 0.26, and a PEG of -0.24. The consumer services sector has a P/E of 21.3 and a Forward P/E of 25.5. Meanwhile, the S&P 500 average has a P/E of 20.5 and a Forward P/E of 17.7.
Comparing J.C. Penney to both the industry standard and the S&P 500 average shows that the company still has a long road to toe during the turnaround. The silver lining comes in the form of that 0.26 P/S ratio, showing that JCP has the revenue generation capability to ride out all of the changes Ron Johnson is attempting to implement.
The other saving grace for J.C. Penney is that the balance sheet is showing signs of strengthening. As of January of 2012, JC Penny's has dropped inventory levels below $3 billion for the first time in three years. Also, the long term debt fell from $3.099 billion in January of 2011 to $2.871 billion in January of 2012. Combine that with JC Penny's stock having support at the $14.40 level, and you may have a case of the bottom already being in.
The Story: J.C. Penney CEO Ron Johnson is drawing on his experience from his time as an executive with Apple (AAPL). J.C. Penney is no longer giving forward guidance, and JCP has begun the trend of secrecy long excepted from Apple. Does this mean JC Penny will become the innovator of the retail sector? Doubtful, but JCP could cause a stir if the turnaround can finally begin to reverse course and move upward.
Aside from the micro picture focused squarely on JCP, there are macro economic factors working against them in the short term. If the Federal Reserve were to raise interest rates, that would actually create more disposable income for the individual consumer. With an interest rate hike from the Fed, banks will be more inclined to lend. More lending will in turn spark businesses to expand. If businesses expand, that means more jobs, which means more disposable income. When the Fed finally raises interest rates, most likely later this year, that will help the retail space move upwards as a whole.
How To Play It: J.C. Penney is not for the feint of heart as an earnings season play. The only move I see being beneficial for the more aggressive investor is a butterfly spread to play a sizeable move for the stock in either direction. An outright buy or sell rating headed in to earnings would be naive, if not ill advised. As for the long term health of J.C. Penney, this upcoming earnings season could tell us whether or not they are still in a spiral or have finally hit rock bottom.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Always consult with a financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.