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Summary

  • J.C. Penney reported solid first quarter results, indicating that its turnaround is well on track.
  • J.C. Penney has arranged for the necessary credit lines to continue its turnaround.
  • J.C. Penney is cutting costs and promoting key products to enhance sales.
  • Solid growth in earnings is expected at J.C. Penney for the next two years.

Shares of J.C. Penney (NYSE:JCP) have turned around remarkably in the past three months, gaining more than 50%, and it looks like the company's spectacular turnaround is set to continue after its recently released first quarter earnings. J.C. Penney reported sales growth in its first quarter, with net sales increasing to $2.8 billion from the year ago period's revenue of $2.64 billion. This was its first quarterly sales jump in the past three years. Also, margins improved by 230 basis points compared to the same quarter last year, while J.C. Penney minimized its losses to $1.16 per share, exceeding the $1.22 loss per share estimated by analysts.

Hence, after a dismal performance over the past few years, J.C. Penney has been posting some pretty good numbers under the leadership of CEO Mike Ullman. Although the company still has losses, they are being reduced. Looking at the strategies of J.C. Penney, I believe that its spectacular turnaround should continue.

Smart strategies

Penney has carried out its turnaround strategy in three stages. First was the stabilization stage, which was followed by the phase of rebuilding, and the third stage was the go-forward phase during which the company is repositioning itself for long-term profitable growth. Penney has already completed the first two stages and is currently in the third phase.

The third phase mainly focuses on refining its merchandise and marketing strategies, steadily growing its sales and improve the margins, and curbing expenses. Management is currently implementing this phase, and it is happy with the results that have exceeded expectations. The company has managed to improve its margins, and management anticipates further improvements going forward.

To continue its turnaround efforts, Penney has also arranged for the necessary sources of cash. It has obtained a $2.35 billion credit facility, replacing its existing bank line of $1.85 billion. The facility is being underwritten by Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) Merrill Lynch, as well as JPMorgan (NYSE:JPM), Barclays and Goldman Sachs (NYSE:GS). This will increase its borrowing capacity by $500 million. It also managed to curtail its expenses by lowering corporate support and advertising cost. Coupled with $1.17 billion in cash, Penney certainly has the necessary resources to continue investing in its business and sustain its turnaround.

Focusing on growth

J.C. Penney has re-launched its new home store with the name Home Collections of J.C. Penney. It has rearranged its merchandise assortment in a manner that makes optimum utilization of its floor space, keeping in mind customer preferences. It has refined the merchandise according to customers' budget and lifestyle. J.C. Penney has also opened 30 new Sephora stores, which continue to deliver good results.

J.C. Penney is also focusing on its marketing strategy, and its new punch line "When It Fits You Feel It" has been received well by customers. This new brand positioning is aimed at differentiating J.C. Penney from its peers. Its promotions were mainly focused around Easter and Valentine's Day last quarter. All these efforts have finally paid off as they managed to bring customers back to J.C. Penney's stores. Its digital marketing has also increased and its online sales rose 25.7% for the quarter.

Challenges

Although J.C. Penney's turnaround is going on at a good pace, investors should remember that the company still has a long way to go. Its balance sheet is still constrained with a cash position of $1.17 billion compared to a massive debt of $5.59 billion. So, J.C. Penney's performance going forward would also depend on its negotiations with its financiers. If it receives favorable terms, then it can easily invest in its turnaround, but unfavorable situations could result in tough times.

Also, Penney needs to shore up its cash generation. The company's operating cash flow over the last twelve months is a negative $1.33 billion while the levered cash flow is again negative at $2 billion. Hence, the company needs to overcome these issues to sustain its performance going forward.

Bright projections

J.C. Penney's first quarter has been rewarding and the business continues to show improvement. Management is satisfied with the comp performance in such a challenging environment, and a look at analysts' estimates will suggest that the company should continue outperforming. For this year, analysts expect J.C. Penney's earnings to increase 53.4%, followed by a jump of 52% next year. Thus, all in all, the signs are there that J.C. Penney will continue its remarkable turnaround.

Due to losses, J.C. Penney doesn't have any trailing or forward P/E, but a PEG ratio of just 0.11 indicates that J.C. Penney is expected to grow at a solid rate going forward. Management proved its potential with solid first quarter results, and is confident the company will perform better in the future and return to profitability. Considering these factors, J.C. Penney seems to be a good investment option.

Source: J.C. Penney: Don't Miss The Turnaround