J.C. Penney Has Potential, But Looks Risky Heading Into Earnings

Aug.12.14 | About: J.C. Penney (JCP)

Summary

2014 has been a roller coaster for J.C. Penney and its shareholders, with shares being cut nearly in half before doubling from their lows.

In spite of this volatility, the business is showing signs of improvement as it struggles to survive.

The fact that the retailer's situation is improving demonstrates that there is a great deal of potential if things continue improving, but matching analyst expectations might still be a challenge.

One of the most interesting stock stories during 2014 has been J.C. Penney Company (NYSE:JCP). In light of a possible bankruptcy, shares of the once high-flying retailer took a roller coaster ride during the year, falling from their closing price of $9.15 to as low as $4.90 before soaring back up to $9.37 where the company's stock is currently trading. For this reason alone, earnings season will likely be particularly volatile for investors but this could allow market participants an excellent opportunity of grabbing a nice business at an attractive price.

Earnings expectations are bad… but far better than last year!

For the quarter, which will be reported on Aug. 14, J.C. Penney is expected to report revenue of $2.78 billion. Although this may not seem like much for a company that, in 2011, booked sales of $17.76 billion, matching forecasts would place the retailer back on the growth track with year-over-year revenue growth of 4.5%. The most likely driver behind this expansion would likely be the company's comparable store sales which, last quarter, jumped up 6.2%.

Earnings Preview
  Last Year's Forecasted
Revenue (billions) $2.66 $2.78
Earnings per Share -$2.20 -$0.94
Click to enlarge

Looking at profits, the situation appears a little worse but better still than what management reported in last year's quarter. If estimates turn out to be correct, J.C. Penney will see its loss per share come in at $0.94, an improvement over the $2.20 loss reported during the second quarter of its 2013 fiscal year. This development is, undoubtedly, good news for the business, but when you consider that the company's share count increased by 38% during this timeframe, the loss will go from declining an estimated 57% to a more modest 41%.

Takeaway

Right now, the situation doesn't look particularly pretty for J.C. Penney, but it does look as though things are improving. In the event that management can match or exceed expectations this quarter, investors have a lot of upside to look forward to, but any meaningful shortfall would likely send the retailer's stock plummeting. With this in mind, investors should be no more than cautiously optimistic about the business.

While the past few quarters have shown signs of improvement, the company's designation as a turnaround illustrates that the assessment of the business can change very rapidly. In a sense, J.C. Penney is living quarter-by-quarter, with even the slightest bad news having a potentially severe impact on its shareholders. This does not mean that the company is not an interesting prospect, but it does suggest that it's not a clear-cut win either.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in JCP over 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.