J.C. Penney: No, It's Not Dead Money

| About: J.C. Penney (JCP)

J. C. Penney (NYSE:JCP) observed positive growth in its in-store and online sales in September. Though September sales declined 4% year over year, but there was a 580 basis points improvement compared to August sales. Its September online sales on jcp.com rose 25.3%, higher compared to 10.8% in August. This growth represents improvement in traffic trends as well as online sales. On October 15, 2013, JCP plunged by 7.4% to $7.29 in the noon trading due to the rumors that J.C. Penney has hired bankruptcy lawyers. J.C. Penney's spokesperson has already denied this rumor.

Retailers gearing up for holiday season sales

Thanksgiving Day, Black Friday, and Cyber Monday are considered to be the major days of the holiday season for retailers, as they do most of their holiday season business on these days. Last year, J.C. Penney posted an increase in revenue at stores of 0.3%, better than Wall Street's estimate of 0.1%. During the week after Thanksgiving and week before Christmas, J.C. Penney observed an increase in traffic in-stores as well as orders on its website. This year, to improve sales during this period, the company has returned to its discount and coupon approach. This will be more of a labor intensive task, as it will need more assistance to help customers and update the discount price boards. In the most recent quarter, Mike Ullman, CEO of J.C. Penney, said that its top priority,

has been to improve traffic and purchase conversion by reconnecting with our customer who frankly had lost faith in us" and that "bringing back promotions was a critical first step.

For the month of September, J.C. Penney reported positive sales, which represent its well performing women's and men's apparel, fine jewelry, and women's accessories categories. The company derives most of its revenue from these categories. We believe that the company's well performing category will continue to boost business over the forth coming holiday sales.

J.C. Penney's competitor, Kohl's (KSS), faced a challenging time during the holiday season. Kohl's posted 0.1% decline, below Wall Street's estimate of 2.2%. The company posted weaker than expected sales during the holiday season due to unfavorable weather conditions and lower consumer confidence. This forced Kohl's to give higher discounts, which significantly impacted its sales as well as its earnings. This year, the company is working to improve its merchandising, execution strategies, and expand the number of private and exclusive brands. Kohl's has expanded its apparels, fashion jewelry/beauty, and cosmetic categories. In addition, it has made huge investment to upgrade its online store business.

Compared to J.C. Penney and Kohl's, Macy's (M) was the biggest winner as it reported a 6.2% increase in its sales in December 2012, beating Wall Street's estimate of 5%. Due to the increase in sales, the revenue for the year increased 5.7%. The company benefited by training its employees for the seasonal holiday sales and focusing on exclusive merchandise such as a line of shirts and ties under famous brand names. In order to increase sales this year, Macy's is taking several measures such as developing e-Commerce business, online order fulfillment centers, customer-centric localization initiatives, consolidation of divisions, and improve its merchandising to drive more traffic.

Midnight opening hours are another key factor for retailers. However, J.C. Penney followed its tradition of opening stores after midnight. On the other hand, its peers Macy's and Kohl's opened their stores at the stroke of midnight. Even though J.C. Penney observed a slight increase in sales last year, it could have made more profits if it opened at midnight. We expect that this holiday season, J.C. Penney will open its store early compared to the previous year's store opening hours in order to generate higher revenue.

J.C. Penney, along with its peers, is gearing up for the most awaited holiday season, which is soon to arrive. The company currently operates around 1,100 stores and plans to hire approximately 35,000 temporary employees in order to provide better assistance to its customers. Meanwhile, its peers Macy's and Kohl's are also planning to hire 83,000, and 53,000 temporary employees respectively.

J.C. Penney has also added Disney's shop in 565 of its store locations as well as its online shopping website. The Disney shop will offer toys, collectibles, and children's apparel specially designed for J.C. Penney with Disney characters. Disney has attractive and imaginative products that can draw kid's attention to the store. J.C. Penney's general merchandise manager for the children's section said,

The addition of Disney Shops to J.C. Penney will be a major draw in our kids department, offering customers an entirely new selection of high quality gifts just in time for the holiday season.

In support of this statement, we believe J.C. Penney is well positioned to capitalize on the holiday sale since children are a significant the growth driver for sales and Disney merchandise has always been a huge seller during the holidays. J.C. Penney can make the most out of this opportunity as more customers will be attracted towards its stores during the holiday sale.

Weak business fundamentals lead to divestiture

Even though J.C. Penney has shown a sign of hope, its performance was disappointing over the previous quarters. The company could no longer incur the losses generated from its Outlet store operations. Hence, it has announced to shut down around 15 outlet stores in 14 states in the U.S., resulting in loss of around 1,400 jobs. To sell the remaining stock, it has announced a "Going Out of Business" or "Total Inventory Blowout" sales at each outlet store. The offerings will be worth $70 million with quality brand names and private label products, which will be offered at discounts of 25% to 75%. J.C. Penney is focusing on closing its under-performing stores to become cost-effective.


J.C. Penney is gearing up well and is leaving no stone unturned for this holiday season. With its initiatives, we believe it will drive moderate revenue from the holiday sales. It's well performing categories and the new Disney store should attract more customers during the holiday season. As mentioned earlier, J.C. Penney expects to see an improvement in its sales for the remainder year, but considering its past quarter performance, which has been disappointing, we would recommend investors to hold this stock for now.

Also, the levels at which the stock has been trading currently, it would be a good idea to take a small investing position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.