J.C. Penney: Don't Give Up On Marvin Ellison Yet

| About: J.C. Penney (JCP)

Summary

A bad April quarter, in line with other retailers, has set JCP back.

CEO Marvin Ellison continues to make the right moves, refinancing debt and reducing expenses.

With the stock at one-fifth sales, it's still a speculation. But not the worst on the market.

When Marvin Ellison became CEO of JC Penney (NYSE:JCP), over a year ago now, everyone knew he had his work cut out for him.

Despite this, the company's stock has had two magical run-ups in the last year, one in October and one in February, after it announced excellent earnings for the Christmas quarter. But a poor spring has taken the air out of that balloon. The stock opened trade Monday just pennies from where it was a year ago.

The reason for that, however, has very little to do with Ellison's performance as CEO, and that is what investors need to know. All retail stocks, especially stocks of companies located in malls, are being crushed, as online shopping moves into apparel and people continue dressing down.

The real news from JC Penney isn't that bad, a move to refinance its debt so it won't be so crushing. A $4.4 billion debt load on $9.1 billion in assets remains unacceptable for a retailer. The new deal rolls over the 2018 debt and charges nearly 6% interest, but it's a long way from rumors of suppliers not shipping, which is what it faced in the wake of the Ron Johnson debacle.

Ellison, like Johnson, is an outsider to Penney's, but not an outsider to its brand of retailing. His career includes stints at Home Depot (NYSE:HD), a logistics expert, and at Target (NYSE:TGT), a solid mainline marketer. At $12.6 billion in sales, Penney's is a comparative minnow. But in his first five quarters in charge Ellison has churned out nearly $5 billion in gross profit on a little over $15 billion in gross revenue. That's not bad.

The refinancing will help turn those gross profit results into real profits over the next two years. So will cutting sales, general and administrative costs, down about $100 million for the most recent April quarter compared with the previous year. The debt helps make the cash flow numbers look sick --- Ellison lost $562 million in financing during the last fiscal year thanks to that debt.

But this is still not a hopeless cause. JCP still has a market cap of under $2.5 billion on $12.5 billion in sales. That's too low. If Ellison can even get that to one-third of sales - well-run retailers sell at half sales - he can still be your hero.

I think he can. Ellison's first back-to-school season was a success. His first Christmas was a success. Those customers are likely coming back for more this year, and it is possible they will bring some friends. Moving more heavily into home furnishings, essentially taking the ground Sears (NASDAQ:SHLD) has surrendered, makes good sense. The Sephora relationship continues to do well and the bad quarter announced most recently is bad news shared by almost every retailer, especially those in apparel.

What Ellison still needs to do is transform Penney's from a place people "shop" - which they don't do anymore - into a place where people buy. A lot of people insist that there is no place for a middle-market department store anymore, especially one with a lot of mall locations. But if he can get even halfway there investors who buy now are going to be very, very pleased. I think he can.

Disclosure: I am/we are long HD.

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.