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Summary

  • Guidance for mid-single-digits growth in 2014 likely translates into 3% to 4% growth in 2015.
  • The chance of lost customer recapture halves each year.
  • J.C. Penney's growth rate is likely to regress to a regular long-term growth rate by 2017/2018, with minimal boost then from continued lost customer recapture from Ron Johnson years.
  • Slowing growth means that J.C. Penney's potential may be as a $13 billion to $14 billion revenue company.

An item that hasn't been discussed too much with J.C. Penney (NYSE:JCP) is that its guidance appears to indicate a fairly high likelihood of moderately slowing growth for 2015. The guidance for 3% to 5% growth in Q1 2014, and mid-single-digits (say 4% to 7%) growth for 2014 means that J.C. Penney is expecting to recapture some customers in Q1 and keep those customers coming back regularly, but that the rate of recapture slows down throughout the rest of the year. Therefore the guidance for 4% to 6% growth for 2014 appears to indicate guidance for 3% to 4% growth in early 2015 based on trends coming out of Q4 if J.C. Penney shows a steady improvement in growth throughout the year.

Another Look at Stacked Comps

The key item to keep an eye on with J.C. Penney is how its growth rate progresses throughout the year. That will give a strong indication of how 2015's growth rate will start out. 2013 was an interesting year in that seasonally-adjusted sales were essentially flat from Q1 to Q4. As shown in the below table, stacked comps versus 2010 declined during each quarter. However, 2010 was a fairly strong year with estimated 3% to 4% real growth, so the 2.3% decline in stacked comps from Q1 to Q4 (calculated as 68.6% divided by 70.2%) translates into actual growth of approximately 0% to 1% per year.

Stacked Comps Vs. 2010

% Change

Q1 2013

-29.8%

Q2 2013

-30.0%

Q3 2013

-30.8%

Q4 2013

-31.4%

2015 Growth at High End of Guidance

Here's a scenario where J.C. Penney hits the high end of its guidance. Same store growth of 5% in Q1 2014 increases by 0.8% per quarter, and FY 2014 comes out to 6.3%, which is consistent with the higher end of the mid-single-digits full year guidance.

Q1 2014

Q2 2014

Q3 2014

Q4 2014

FY 2014

Same Store Sales

5%

5.8%

6.6%

7.4%

6.3%

As mentioned earlier, seasonally adjusted sales growth was approximately 0% to 1% in 2013. Here's what seasonally adjusted sales (with Q1 2013 = 100) looks like at 1% growth for 2013. If 2014's growth trends continue into 2015, then 2015's growth rate will be about 4.0%. From eyeballing the Q4 2014 growth rate, one may think that 2015's growth rate should be close to 8%, but due to the tougher comps in 2014, the 2015 growth rate suggested by a progression from 5% growth in Q1 2014 to 7.4% growth in Q4 2014 would actually be 4.0%.

Q1 2013 = 100

Q1

Q2

Q3

Q4

2013

100.0

100.3

100.5

100.8

2014

105.0

106.1

107.1

108.2

2015

109.3

110.4

111.4

112.5

2015 Growth at Low End of Guidance

Now here's a scenario where J.C. Penney hits the low end of its guidance. Same store growth of 3% in Q1 2014 increases by 0.5% per quarter, and FY 2014 comes out to 3.8%, which is consistent with the lower end of the mid-single-digits full year guidance.

Q1 2014

Q2 2014

Q3 2014

Q4 2014

FY 2014

Same Store Sales

3.0%

3.5%

4.0%

4.5%

3.8%

In this case, if 2014's growth trends continue into 2015, then 2015's growth rate will be about 2.9%, as illustrated through the table of seasonally adjusted sales below.

Q1 2013 = 100

Q1

Q2

Q3

Q4

2013

100.0

100.3

100.5

100.8

2014

103.0

103.8

104.5

105.3

2015

106.1

106.8

107.6

108.4

Effect on Revenue

Here's a look at what effect those growth rates have on future revenue. The base of $11.8 billion is slightly lower than actual 2013 revenue of $11.859 billion to account for the effect of the early 2014 store closings.

Based on trends within guidance, a likely scenario for J.C. Penney's modeling is that mid-single-digits growth in 2014 slows to 3% to 4% in 2015, to 2% to 3% in 2016, to 1.5% to 2.5% in 2017, and to 1% to 2% in 2018. One could argue that J.C. Penney will be able to increase or maintain 2014's growth rates, but as noted in a previous article, the likelihood of lost customer recapture typically halves each year. By 2018, the amount of potential lost customer recapture from the Ron Johnson years is minimal, and J.C. Penney will be left with its normal growth rate. I've modeled in a 1% to 1.5% long-term growth rate for J.C. Penney which is probably quite generous, and at the very least fair.

At the high end, these growth rates mean that J.C. Penney will reach approximately $14 billion in sales by 2018. This will translate into approximately $1 billion in EBITDA.

Year

Base

2014

2015

2016

2017

2018

Sales ($ Million)

$11,800

$12,543

$13,045

$13,436

$13,746

$13,993

Same Store Sales Growth

6.3%

4.0%

3.0%

2.3%

1.8%

At the low end, these growth rates mean that J.C. Penney will reach approximately $13.3 billion in sales by 2018. This will translate into approximately $800 million in EBITDA.

Year

Base

2014

2015

2016

2017

2018

Sales ($ Million)

$11,800

$12,248

$12,604

$12,881

$13,100

$13,270

Same Store Sales Growth

3.8%

2.9%

2.2%

1.7%

1.3%

Conclusion

What we are left with here is a situation where J.C. Penney is demonstrating growth, and showing continued positive growth for multiple years. However, the rate of customer recapture slows over time, leading to growth regressing to a mean of 1% to 1.5%. This leads to between $13.3 billion and $14 billion in revenue in 2018, with around $800 million to $1 billion in EBITDA. J.C. Penney can theoretically keep going without dilution or bankruptcy if it meets these numbers, but also is left with a continued large debt burden and some refinancing risk as some of its bonds mature over the next few years. As noted before, with the size of J.C. Penney's debt burden, EBITDA of over $1 billion (about $1.16 billion) is needed to justify a price of $8. As well, I believe there is a high chance of additional store closures since much of the growth is going to come from e-commerce, leaving the in-store sales per square foot at a low number even in 2018. I suppose if J.C. Penney meets these growth numbers it isn't a terrible situation for it as a company. However, it seems likely that its stock will settle in a lower range if/when it becomes apparent that growth rates are slowing and that the majority of customers lost over the last few years have established strong new shopping habits.

Source: J.C. Penney: How Guidance Signals Growth Expectations For 2015