3 Terrific Reasons Why J.C. Penney Will Continue Soaring

| About: J.C. Penney (JCP)

Summary

J.C. Penney is now reporting year over year growth in revenue, and is cutting losses aggressively.

J.C. Penney has sound strategies to attract customers back to its stores.

J.C. Penney online growth and cost control moves should help it sustain its turnaround and soar to new highs.

J.C. Penney's (NYSE:JCP) turnaround has gained solid momentum since mid-April, with the stock gaining close to 20%. Recently, Penney's turnaround received a solid endorsement from ITG Research, which said that the retailer's results might exceed consensus estimates. In fact, ITG expects Penney to report same-store sales growth of 6.2%, as compared to the analyst consensus of 5.8%. Now, looking at the moves that Penney is making, it won't be surprising if it actually delivers a better than expected performance when its reports results next.

Strategies are yielding results

Penney's top line has started increasing on an year-over-year basis, and it is also cutting its losses aggressively. The company has been able to achieve a turnaround on the back of sound strategies, and going forward, it expects things to get better.

J.C. Penney is now in the go-forward phase of its turnaround, having completed the stabilization and rebuilding phase last year. The company is now looking to increase market share and improve its operational and financial results. Also, it is revamping its merchandise in departments such as men's apparel, women's accessories, and Sephora.

Penney is focusing on several key priorities, including merchandising assortments and e-commerce to engage customers and make it easy for them to shop. Penney is aggressively improving its marketing to reconnect with customers and a create seamless customer experience across all channels and services. These priorities are already reaping results for the company, as its gross margin had increased to 33.1% in the first quarter as compared to 30.8% in the same quarter last year, representing a 230 basis point improvement.

Attracting more customers

Penney is improving its assortments and product line up. It will bring back important private brands such as St. John's Bay, Worthington, Stafford, J. Ferrar, A.N.A., Ambrielle, and Xersion to its locations. Also, the company is seeing robust revenue increases in some of its largest national brands, such as Levi's, Nike (NYSE:NKE), Carter's, IZOD, and Van Heusen, which should strengthen its assortment. All in all, Penney is trying to create an appealing shopping environment around these brands in a bid to attract more customers to its locations.

Also, as a part of its diversification strategy, Penney is now focusing on bedding and bath, small electrics, decorative accessories, and home furnishings, which will fit customers' budget and lifestyle needs. The company has re-launched Home Collections of J.C. Penney, its new home store, and re-merchandized the floor to make the better use of the space to improve the shopping experience.

So, Penney is making a number of impressive customer-centric moves that should help it regain its customer base going forward.

It has also opened 30 new Sephora stores inside J.C. Penney locations, bringing the total to 476 stores overall. Penney has also expanded eight existing stores of its strongest performing support locations to increase its footprint inside the store. It plans to open additional Sephora stores in the second half of the year.

Digital moves and cost controls

Apart from these, the retailer is focusing on its online channel with Jcp.com. Penney is delivering tremendous improvements in its online sales. In fact, in the previous quarter, its online sales grew 25.7% from last year. The company is closely working with its associates to help customers find the appropriate size, style, and colors at Jcp.com. Further, the company is completing online orders right at the point of sales, and shipping the orders free of cost from stores.

Additionally, the company is undertaking various initiatives such as lower corporate support costs and advertising expenses, leading to a drop in SG&A expenses. In fact, Penney's SG&A expenses were down $69 million in the first quarter, representing a 490 basis point improvement from last year. Also, its operating loss narrowed to $247 million, an improvement of 49.2% as compared to last year. Penney will continue executing on these areas, and this should probably help the company to reduce its losses further.

A concern

However, not everything is in Penney's favor. Investors need to keep an eye on its huge debt position. Penney's balance sheet is not in the best of health as it has a massive debt of $5.59 billion, while its cash position is relatively weak at $1.17 billion. Additionally, the company's cash flow metrics also paint a poor picture. Over the last twelve months, its operating cash flow is a negative $1.33 billion. Additionally, Penney's levered cash flow is also negative at $2 billion for the last twelve months.

Hence, Penney is burning cash as it is investing in its turnaround. So, its performance will depend on its negotiations with financiers and bankers. If Penney manages to get favorable terms of financing, then it can continue investing in its turnaround. However, an unfavorable situation can lead to trouble for the company.

Conclusion

J.C. Penney is a risky turnaround play due to its huge debt. However, the company is making some good moves and it is also reporting growth in key metrics such as sales and traffic. In addition, Penney is cutting its losses at a good pace. Going forward, the company's turnaround looks set to continue as analysts expect its bottom line to improve 54% this year and 50% next year. Hence, investors should remain invested in J.C. Penney as it is an enticing turnaround play.

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