Ever since releasing its fourth-quarter results back in February, J.C. Penney (NYSE:JCP) has been on a tear. In fact, over the last six months, shares of the retailer have soared an impressive 64%. But will J.C. Penney be able to continue its impressive run post the upcoming second-quarter report? Let's find out.
What are the expectations?
Analysts expect a revival on J.C. Penney's fortunes, as the estimates indicate. Its losses are expected to come down to $0.94 per share from last year's $2.20. Revenue is expected to increase to $2.78 billion versus 2013's $2.66 billion. Hence, it might seem that J.C. Penney's turnaround is on track, but will the company be able to sustain it?
The company is facing tough challenges. J.C. Penney needs to survive the ongoing rat race between Macy's (NYSE:M), Kohl's (NYSE:KSS), and various other retailers. It also needs to contend with the rising cost of goods, as its competitors are offering merchandise at lower prices.
However, Macy's and Kohl's reports were not positive in the previous quarter, at a time when J.C. Penney did well. J.C. Penney grew its comparable store sales by 6.2% last quarter, managing to drive strong sales growth when most of the established retailers complained about bad weather conditions during winter months. Hence, the company did well in difficult times, and it might be able to improve further in the future.
Strategies for the future
As a part of J.C. Penney's mantra of expanding its business profitably, it is closing of some of its loss-making stores. On the other hand, it is opening its first store in Brooklyn, which seems to be a high potential market, improving its standing in New York City. J.C. Penney will concentrate on maintaining high standards with this store, keeping brands that are in high demand, innovative designs, and also lay emphasis on bridal and jewelry departments.
J.C. Penney has closed down 33 stores this year, and is likely to close two more. This will help J.C. Penney cut down its losses. It is also making all its stores livelier by keeping attractive assortments featuring millennials. J.C. Penney is also planning to put some malls, which have been facing adverse situations, on sale so as to avoid any hurdles in the company's turnaround. It will close the stores when selling these properties becomes profitable.
The two factors that contributed largely to J.C. Penney's loss in the previous year were pension expenses and restructuring and management transition cost. However, these expenses are expected to decrease considerably this year. As I stated in my previous article:
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.
Striking a chord with customers
After tasting failure by adopting non-promotional strategies during Ron Johnson's era, J.C. Penney has switched back to promotions. It is distinguishing itself by bringing creativity into its stores. Recently, it showcased unique mannequins in its popular New York store. By unique mannequins, I mean mannequins that define 'beauty in every body shape.'
This is an addition to its 'When it fits you feel it' campaign. Models are inspired from particular people in real life that include a woman in a wheelchair, a man with dwarfism, a double leg amputee, a tall boy and a plus-size girl. This act will help develop acceptance of all sorts of bodies and attract more people to J.C. Penney's stores.
In addition, J.C. Penney is sponsoring Blake Shelton's "Ten Times Crazier" tour 2014, which aims at raising awareness and funds through a tweet-to-donate social media campaign, inviting shoppers and fans to use #JCPandBlake4USO and tag @JCPenney in their social media posts. For every post, Penney will donate $1 to the United Service Organization (USO).
J.C. Penney had initiated a drive in July 2012 and December 2013, where the customers making purchases were invited to round up the amount to nearest dollar to support the USO. It had contributed more than $5 million then. With recent enhanced efforts, J.C. Penney is trying to build a bond with people and reconnect with its lost customers. These efforts should help J.C. Penney get its lost reputation back.
Quite clearly, J.C. Penney is making all the right moves. It is shuttering unprofitable stores, reconnecting with lost customers, and improving its standing in the retail industry by offering products that are in demand. So, investors would do well to hold on to Penney as it looks like a good long-term investment.
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.