J.C. Penney: A Battle Has Been Won, But Not The War

| About: J.C. Penney (JCP)


Solid comparable store sales growth, and solid guidance ahead.

A new bigger, longer and cheaper credit line has been announced.

Despite this good news, I remain cautious as the company has a long way to go.

J.C. Penney (JCP) surprised the market with relatively good first quarter results, a comforting outlook for the rest of the year and the announcement of an improved and larger credit line.

Despite the big improvements, I remain hesitant about the stock in the longer run.

First Quarter Results

J.C. Penney reported first quarter sales of $2.80 billion, up 6.1% compared to last year.

The company reported a GAAP loss of $352 million compared to a loss of $348 million last year. Progress seems very limited based on these cold hard numbers, yet the company actually made significant progress in its operations as discussed next.

Looking Into The Operations

For starters the company managed to grow revenues significantly again, driven by a 6.1% increase in comparable store sales. Sales growth was accompanied by 225 basis point improvement in gross margins which came in at 33.1% of sales. Margin expansion came despite an increase in clearance sales.

The two favorable factors combined drove a 14% increase in gross profits which came in at $926 million. The company cut its selling, general and administrative costs by 6.4%, yet at $1.01 billion these costs already ate all the gross profits, and then some more.

As a result the company posted an operating loss of $247 million which is still very significant compared to its revenues although it is much less than the $486 million loss reported last year. Interest expenses rose by 59% to $97 million, only adding to the GAAP loss.

The only reason why net losses increased compared to last year is due to a $199 million tax benefit as reported last year. Important for investors is that operating losses fell from 18.5% to 8.8% of revenues, which implies that more improvements are needed.

Another promising sign is the 25.7% jump in online e-commerce sales.

Looking Into The Year

For the current second quarter, comparable store sales are expected to increase by mid single digits which implies revenues to come in around $2.8 billion again.

Gross margins are seen up compared to the past quarter, while selling, general and administrative expense are seen slightly below last year's levels.

Full year comparable sales are seen up by mid-single digits and significant improvements in gross margins is anticipated. On top of this, J.C. Penney expects its free cash flow to breakeven while ending with more than $2 billion in liquidity after limiting capital expenditures to just $250 million. This is far less than $630 million in anticipated depreciation and amortization charges.

What About The Balance Sheet?

J.C. Penney ended the quarter with nearly $1.2 billion in cash and equivalents while having $5.6 billion in debt and lease obligations outstanding, This results in a continued high net debt position of $4.4 billion.

Important to notice, inventories rose slightly to a little over $2.8 billion in the quarter, trailing sales growth. The company furthermore obtained a new $2.35 billion credit line, replacing the current $1.85 billion ABL bank line. The deal gives the company additional liquidity, better terms and an extended maturity.

At $10 per share, equity in the firm is valued at just $3.0 billion, the equivalent of 0.25 times its trailing revenues of $12 billion, while the company still reported huge losses.

Takeaway For Investors

The demise of J.C. Penney in recent years has been well-documented. After ousting CEO Ron Johnson the company is getting back on track, or is at least able to stabilize the business under command of Mike Ullman.

The company has returned to its long time strategy of promotions and coupons as well as lower-end merchandise in order to attract a loyal shopping group.

The company just finished its second quarter in which it reported positive comparable sales growth, but note that comparisons will become more difficult in the future. Yet the company continues to foresee similar comparable sales growth for the remainder of the year, which might allow the company to return to profitability in the peak holiday quarter. Even as the company might be able to return to the black for the shopping season, the company will still lose a lot of money this year.

Both the guidance and the new credit line are major wins for the company which is making progress but has a long way to go. While the bulls have won a battle in the first quarter, they haven't won the war.

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.