J.C. Penney's financial outlook is getting better as the company recently closed a new $2.35 billion asset-based senior secured credit facility.
Penney's pension expenses are expected to go down considerably which will also improve its financial outlook.
Also, Penney's management restructuring cost is also expected to take a steep dive this year and this will diminish the company's debt.
The retailer is also making shrewd moves to increase drive in-store and online sales.
J.C. Penney's turnaround is on track, which is why it is a great buy.
J.C. Penney (NYSE:JCP) is in turnaround mode. The stock has gained solid traction in the last quarter, and considering the strategies that it is following, Penney looks set to improve further. Moreover, the company's financials are improving. Its last quarter's results were fantastic, and the company is looking to build upon this momentum going forward.
Cost control and financing
Having a positive and constant cash flow is the immediate goal of J.C. Penney. Last month, J.C. Penney announced that it closed a new $2.35 billion asset-based senior secured credit facility, comprised of a $1.85 billion revolving line of credit and a $500 million term loan.
The new facility comes in place of a $1.85 billion credit facility that was slated to mature in 2016, and provides better loan rates than the previous facility. Thus, the company awaits better pricing with all these improved business trends. This financing is anticipated to provide improved pricing terms and increase $500 million of incremental liquidity during peak seasonal needs, and improve 2014 year end liquidity by a margin of $100 million.
Also, pension expenses contributed greatly to J.C. Penney's total loss in previous year. Last year, all the qualified pension plan expenses cost Penney about $100 million. However, this scenario is set to change this year as the company expects the primary pension plan income to be roughly $19 million, a difference of $119 million from last year.
In addition, J.C. Penney's restructuring and management transition cost, which was $215 million in FY2013, is also expected to decline this year. Restructuring and management transition costs include money spent as compensation due to sacking employees and the expenses involved in shutting down a store.
But since Penney sacked most of its employees last year, it has a more stable management now. In fact, the company's quarterly restructuring and management transition declined $35 million year-over-year and came in at a mere $2 million. J.C. Penney is a heavily leveraged company, but the reduction in expenses will largely supplement its turnaround.
The turnaround trail
J.C. Penney has successfully crossed two milestones on the path to success, one being the stabilization phase and the other being the rebuilding phase. The only one left to ace is the go-forward phase, where it is targeting long-term profitable growth. It is chiefly focusing on two major components of any retailing business -- merchandising and marketing.
It has opened 13 more Sephora stores, taking the total to 489. The home store is re-merchandised, making the best use of the available space and offering home merchandise in an affordable range. The re-launching of 'Home collections of J.C. Penney' created a new buzz. J.C. Penney also expanded its 8 stores that are located in prime locations. All these efforts are expected to steadily increase sales. In addition, promotions and advertisements have also added to the sales of J.C. Penney. Penney's efforts to meet customers' needs and wants should lead to an increase in store traffic and sales.
J.C. Penney's updated assortments are doing well with core customers, and also bringing back old customers. The mix of private, exclusive, and national brands is eye catching, and offers plenty of choices. This is a plus point of J.C. Penney, as customers tend to seek variety. Exclusive brands like Liz Claiborne and Modern Bride inevitably draw attention towards Penney. Also, the in-house design teams are strengthening the private brands, which have so far been outperforming.
Developing online customer-base
Online sales via jcp.com have been a key driver of the company's turnaround. The strategy of further integrating digital capabilities in marketing provides a distinct advantage to J.C. Penney. Online vending has the potential of making J.C. Penney a leader in the channel of retailing. Moreover, this channel has shown constant growth. Online sales were up by 25.7% last quarter. J.C. Penney is completing online orders right at the point of sales, and ships the goods to the customer's home or back to their favorite J.C. Penney store for free.
Finally, it can be said that Penney is pulling the right strings to improve its performance. The company's focus on reducing costs and bringing more customers into the stores will pay off in the long run, making the stock a good turnaround pick.
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