J.C. Penney Q4 Guidance: A Massive Overreaction To Making The Quarter

| About: J.C. Penney (JCP)

On November 20th, JCP gave Q4 guidance and the stock rose to $9.44 from $8.71 the day before and from the low $6s a few weeks earlier post the $9.60 equity raise when their bonds traded to the 60s and an almost 20% yield on fears of vendors pulling their lines. Today, the Company reiterated that exact same guidance and the stock is in the mid $7s - an almost 20% drop. The bonds, however, are virtually unchanged and the bank debt is flat.

What does this all mean? The Company claims to be pleased with its performance, but failed to give month comp. sales numbers which the market was expecting and the Company had been providing for the last few months. JCP told a few analysts that they wanted to get away from monthly sales reporting like most other department stores. Ideally, they would have waited until the new year to start that process, but with liquidity fresh from the holidays, they don't have to answer to the vendors (the most important constituency) or anyone else until late next year.

Given that November was up 10%, it is possible that December and January could be down slightly and the Company could still hit its guidance of positive year over year comp sales increases. Since liquidity guidance is unchanged, it appears unlikely that margins are materially different than the 29%+ implied in the guidance. Back in November the market was ecstatic at the prospect of positive comps and improving margins and now the sky is falling and the stock is down to almost its lows on the exact same numbers. It is safe to say that the Company did not blow away its guidance. It is also safe to say that the Company will meet its guidance because that is what is in the release. The stock is getting whip sawed because it is a turnaround story that is still turning and the Company played cute with its December release.

From industry contacts, I believe JCP had a flatish to slightly up December but the frost has hurt January for all retail players and that has probably taken what was going to be a better than guidance quarter and turned it into an inline quarter. What does it mean for the stock? In the short term, all those playing for a blowout Q4 are selling. For those of us who believe that JCP is in the early innings of a two to three year turn around, we know that things have stabilized - comp. sales are not going down and RJ inventory has largely been purged. Going forward, sales and margins need to accelerate over the coming quarters and years which was the exact same story yesterday and in November. Had the Company given monthly numbers, I doubt the stock would be down. The vagueness of the release let's people fear the worst, which is odd because meeting guidance is not bad for a Company whose operations were in free fall. If the stock was still at $10 or so than I get why the stock should be hit. Down here in the $7s and $8s, this reaction is unwarranted. The bonds have barely skipped a beat which tells you that no liquidity concerns are in the market. In short, JCP is guilty of poor investor relations, but they have stabilized the ship. For the coming year, they need to get margins back to the mid 30s and keep sales flat to up single digits. If they do that or better, the stock will be in the double digits again.

Disclosure: I am long JCP, . 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: Positions can and do change at anytime without notice or warning.

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