Going into February 25th's Q4 2015 earnings release, shares of J.C. Penney (NYSE:JCP) had muddled through the $7-$8 range for some time. However, since the Q4 2015 results, shares have bolted higher and reached a peak price just under $12 a share. Now I'm not going to claim shorts were squeezed or anybody of significance got hurt during this dramatic surge in shares of JCP, but it was nice to see the stock rewarded after consistently strong results over the last few years, not quarters but years. Having said that, as of March 15th's report, short interest did drop heavily from the previous reporting by about 23mm shares. So let's take a look back at what J.C. Penney reported, which was another beat on the top and bottom line.
J.C. Penney reported Q4 2015 adjusted earnings of $.39 a share and a 155% increase in adjusted EBITDA to $715mm for FY15. Comparable store sales grew 4.1 % for the fourth quarter and 4.5 % for the full year. J.C. Penney reported net sales of $4.0 billion compared to $3.9 billion in the fourth quarter of 2014. Gross margin improved 30 basis points to 34.1 % of sales. This acceleration was driven by improvements in clearance and promotional selling margins. SG&A expenses for the quarter were down $70 million to $962 million, or 24.1 % of sales, representing a 240 basis point improvement from last year. These savings were primarily driven by lower controllable costs, more efficient advertising spend and reduced corporate overhead. Free cash flow was positive $131 million, an increase of over $74 million or 130 % from last year.
Shares of JCP have predictably retreated from their recent lofty levels and in a market that has shown itself to be extremely volatile. In a recent article titled "J.C. Penney Continues Its Momentum in 2016" I encouraged investors to consider the following statement:
J.C. Penney had another strong quarter and 2016 will find the company competing in a marketplace that is ever changing and competitive. I would be of the opinion that the company has found a suitable formula for success that includes appropriate price points, assortment, store format and incentives. But within that formula, an understanding that the formula will change with the times is critical for the company to continue to see success.
In short, what I expressed was that investors would be best served to consider and understand that past results are not indicative of future performance. J.C. Penney will need to continue to exhibit a thoughtful and consistently evolving strategy to manage through an evolving retail environment. Given the retailers recognition of on-line versus brick and mortar purchasing activity by the consumer, the company seems to be managing its retail square footage thoughtfully.
In the last three years, the company has closed a total of 83 stores and is scheduled to close 7 stores in 2016, fewer than its peers Macy's (NYSE:M) and Kohl's (NYSE:KSS). With the number of stores J.C. Penney now has, the reality is, Penney operates roughly the same number of stores as it did in 2006. The issue with this metric is that in 2006 its annual sales were at $19.9 billion, $7 billion higher than they were last year. While something may seem off with this equation, management has been forced to recognize that even though the total square footage similarity isn't returning the same revenues as it did in 2006, brick and mortar stores will become increasingly important to the retailers strategy going forward. With J.C. Penney's online sales performing very well over the last several years, picking up merchandise from online orders in local stores is a must to compete with Macy's and Kohl's that already provide this service. As such, J.C. Penney is behind the curve with this service, but plans to have it fully implemented by the Back-To-School shopping season later this year. Ellison last month told investors that shoppers coming in to pick up an online order typically end up spending another 35% on that trip.
It's quite possible and likely that J.C. Penney will supersede its articulated closing of just 7 stores, especially with the company's enormous debt load of almost $5 billion. The company owns more than 400 stores that aren't mall-based and could sell-off some of these assets to pay down debt while not tarnishing the brand or losing valuable retail assets as a whole. I would be of the opinion J.C. Penney will curtail its total store footprint by at least 10 stores during the calendar year and with 2 possibly being wholly owned stores. We'll see how things pan out for the retailer in this respect.
Alongside positive quarterly results, it's nice to see insider purchase activity. With Ellison only have a couple quarters worth of J.C. Penney experience under his belt, the well-established retail veteran from Home Depot (NYSE:HD) has recently purchased some 50,000 shares of JCP at a price of $11.80 a share. Following the purchase, the chief executive officer now directly owns 2,507,317 shares of the company's stock, valued at approximately $29,586,340.60. With Ellison's hands-on approach to retailing, one can probably surmise the CEO has a dedicated long-term outlook for all shareholders concerned. But Ellison is not the only shareholder adjusting his position in shares of JCP as of late.
Other institutional investors have recently modified their holdings of the company. Lebenthal Holdings LLC raised its position in shares of J.C. Penney Company by 27.6% in the fourth quarter. Lebenthal Holdings LLC now owns 539,246 shares of the department store operator's stock worth $3,591,000 after buying an additional 116,611 shares during the period. Alpha Windward raised its position in shares of J.C. Penney Company by 14.0% in the fourth quarter. Alpha Windward now owns 60,689 shares of the department store operator's stock worth $404,000 after buying an additional 7,469 shares during the period. Boston Advisors raised its position in shares of J.C. Penney Company by 396.4% in the fourth quarter. Boston Advisors now owns 831,270 shares of the department store operator's stock worth $5,536,000 after buying an additional 663,800 shares during the period. Assetmark purchased a new position in shares of J.C. Penney Company during the third quarter. Finally, Engineers Gate Manager LP raised its position in shares of J.C. Penney Company by 387.9% in the fourth quarter. Engineers Gate Manager LP now owns 901,155 shares of the department store operator's stock worth $6,002,000 after buying an additional 716,451 shares during the period.
Moreover, positive notes from Deutsche Bank recently found the firm boosting its price target on shares of JCP from $12-$14 a share. The institution maintained its Buy rating on the stock as well. But today, Goldman Sachs has reiterated their Sell rating and $9 price target on shares of JCP. This may put pressure on shares in the near term. For investors seeking a better valuation to establish a new or greater position in shares of JCP, this may be that opportunity. Having said that, it may also be prudent to witness shares break below the $10 mark before "pulling the trigger" as they say. Additionally, let's not forget that Telsey Advisory Group increased their price target on J.C. Penney from $10.00 to $12.00 and gave the stock an "outperform" rating in a report on Monday, February 29th. Presently, shares of JCP carry an average rating of "Hold" and an average price target of $11.31.
I'm of the opinion that shares of JCP are currently valued appropriately and in accordance with the disparity between bulls and bears debating and positioning with shares. While J.C. Penney continues to show a strong business rebound from the Ron Johnson-era low metric performance, the retail landscape is muddled with variables that make the business of retailing extremely difficult and costly. I believe J.C. Penney has put together a strong executive team and a strong plan in place to move the company forward and with increasing levels of profitability over the mid-term. With that said, I will be looking for the next opportunity to deploy capital into the company with the desire to achieve a double-digit return on capital invested.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JCP over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.