After taking a bit of a break for the winter holidays, I am back, and unfortunately J.C. Penney (JCP) has landed in my sights once again.
If you're long J.C. Penney shares, there's some bad news and some good news. The bad news is that Penney's reported mediocre sales for December, posting a comp gain of only 0.3%, in spite of the International Council of Shopping Centers' prediction of 4-4.5% same store sales growth for the retail industry in December.
Even worse, the company drastically slashed its profit outlook for Q4. The company now forecasts EPS of 65-70 cents, before charges of at least $1 per share; this will produce a loss for the year. Less than two months ago, the company predicted $1.05-$1.15 in adjusted EPS for the quarter.
While many pundits seem willing to give new CEO Ron Johnson a pass, it's worth noting that he was already CEO in November and must have approved the original guidance. He is beginning to undermine his own credibility as J.C. Penney's savior. (I should note that I do think he has a good chance to turn the company around over the very long term, 5-10 years; I just do not think shareholders understand how big a project this is.)
The company's underperformance was totally predictable. Last month, I systematically went through management's guidance and predicted adjusted earnings would be as low as 52 cents per share, which is much closer to the mark than the management figure. The GAAP loss of 30-45 cents that J.C. Penney is now projecting is actually worse than what I had expected.
I've discussed J.C. Penney's problems before, so I won't rehash them at great length. The main problem is that the core Penney's customer is from the middle class and does not have the ability to spend like he/she did before the beginning of the Great Recession a few years back. Kohl's (KSS) has faced similar issues this quarter and had to cut its profit outlook.
For J.C. Penney, the problems stemming from economic weakness have been aggravated by Macy's (M) strong showing recently; Macy's (as I predicted back in November) has been growing sales and profits much faster than its competitors. This likely means that Macy's is taking market share at the higher end of J.C. Penney's customer base (which also generates the most profit). Share losses to Macy's have outweighed any benefit the company may be seeing from Sears' (SHLD) ongoing troubles.
The one piece of good news for investors (there's not much) is that so far, the company's shares have barely moved in response to this most recent disaster. While JCP shares were poised for a nearly 10% decline in the early going on Thursday, they ended the week nearly unchanged from where they stood before the company's announcement. Now would be a very good time to take profits (for longs) or to open a new short position. While bad news has thus far failed to bring J.C. Penney's stock price in line with its results, I am a strong believer that the stock price will eventually follow company performance.
I'm far from being the only one who thinks J.C. Penney is massively overvalued. 17% of the company's float had been shorted, as of the most recent data. While I have seen speculation that short covering explains some of the recent price action in JCP shares, I see no reason to change my short thesis. I continue to believe that the company's shares are worth about $25, which still implies a fairly generous multiple of 21x current year earnings.