JC Penney's (JCP) stock price has significantly underperformed the broader markets year to date declining over 20% since the beginning of 2013. To a good extent, the company's underperformance can be attributed to the failed turnaround strategy of its CEO Ron Johnson. In this article, I have tried to analyze the current situation for JC Penney, and whether any reasonable hope of its turnaround still remains. Also, I will discuss two alternative stocks from the same sector, Macy's Inc. (M) and The TJX Companies, Inc. (TJX) which have recently posted strong results and offer solid investing opportunities.
JC Penney - The struggle is still on!
JC Penney's stock price has seen a massive 58% downfall in the last one year. The company came up with disastrous fourth quarter 2012 results with a net loss of $552 million. This was the sixth continuous quarter where the company reported loss. The losses for JC Penney stood at $985 million for the year. The loss drivers were its sales and comp sales which decreased by around 25% and 32%, respectively. The margins also declined by about 23% for the quarter.
The company is working towards the completion of its transformation policy. Under this policy, the company is targeting to transform all of its stores by 2015 to revive its overall brand image. However, this strategy is costing a lot more than its expected benefits along with the dropping cash balances.
The company generated negative cash flow of $10 million in 2012, even after lowering its total stock-pile by $600 million. I don't think it can further reduce its inventory, as doing that will hamper its sales as well as its cash flow position. To make the situation worse, the company's bondholders are demanding their principal repayment after giving a notice of 90 days. This represents more than 50% of JC Penney's 2037 bonds, which translates into around $325 million of additional cash burden.
Also, this raises a serious doubt about the financial viability of JC Penny's transformation strategy. I am skeptical about the company's overall financial health in the upcoming years because the weakening cash position will force the management to opt for self-funding of its transformation policy. JC Penney will either raise debt or issue additional stock. In both situations, the company will have to dilute the holdings of its current shareholders. Considering the shaky financial outlook, I recommend a sell for this stock for now.
What can be the better alternatives?
Macy's reported its fourth quarter and full year 2012 results with an increase of 7.2% year-on-year in the quarterly revenue which was $9.35 billion. The net income was $1.3 billion for the full year increasing by around 6%. This solid result shows the company's success in pursuing and implementing the right strategies at the right time. Macy's expects its comp sales to grow by around 3.5% in 2013.
Another positive factor which will continue to drive the company's sales will be its localization program 'My Macy's'. This consumer focused initiative aims at improving the comp sales along with reducing the operating expenses. In the past, My Macy's strategy has given multi-year same store sales gains. The company has restructured its stores with local taste, by localizing inventories and training its executives to offer more personalized service. Moreover, as a part of this strategy, the company has also removed their divisional central office. This initiative has brought down its administrative expenses, removed duplication, and has fastened execution. With this new store outlook, shoppers find merchandise assortments, size ranges, and shopping experiences that are tailored to their needs. I expect Macy's ongoing strategies will continue to drive the sales in the coming years. The company will achieve around 14% EBITDA margin by 2014, which should drive double digit EPS growth in each of the next two years.
Along with these strategic changes, the company has improved its capital structure too, and has also increased stock repurchase. Its board has approved the increase in share repurchase authorization by $1.5 billion taking the total authorization to $1.86 billion. This increase in buybacks will retire 12% of the company's outstanding shares. I believe share repurchases along with the company's continuous focus on its initiatives will drive more returns for its shareholders in the time to come.
The TJX Companies, Inc.
For the fourth quarter 2012, TJX reported net sales of $7.7 billion, a solid increase of 15% year over year. The net income for the quarter was $605 million with diluted EPS of $0.82, which increased by around 32% from the previous year. The company plans to increase its quarterly dividend on its common stock and simultaneously announce share buybacks. The dividend will be increased to 26% from 14% currently, and will be payable in June, 2013. Moreover, TJX will repurchase $1.5 billion worth of its common stock in 2013, which represents approximately 5% of its outstanding shares.
Moving forward, the company is planning to start its e-commerce channel to boost up its overall sales. It will launch the T.J. Maxx website in a small test mode to sell its off-price goods to on-line shoppers. This new E-commerce site will complement the growing store channels of TJX by offering a wider range of products. It will also sell products which the company is not selling at its stores, thereby increasing the on-line product categories. The company has already bought Sierra Trading Post for $200 million in December, 2012, which will help TJX to launch its e-commerce site. It offers around 2000 high quality brands and has 700 employees with deep Internet retailing experience. Via this acquisition, TJX can capitalize on Sierra's advanced scale and infrastructure capabilities in online retailing.
I believe the launch of its e-commerce channel will turn out to be a big move for the company to capture higher market share and enhance its sales.
I would suggest that investors stay away from JC Penney, as the transformation strategy is not working well for the company. Also, its results are not going to be visible in 2013.
On the other hand, I feel the other two companies are well on track with their impressive quarter numbers and future initiatives to increase their sales. I am optimistic about Macy's, 'MY Macy's' strategy, as it will improve the overall customer satisfaction for the company along with reduction in costs. Moreover, TJX with its increased focus on e-commerce activities, will complement its growing stores channel and will benefit the company in the future.
I recommend a buy for these two stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.