J.C. Penney's Turnaround Is A Mirage

| About: J.C. Penney (JCP)
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When Ron Johnson took over as CEO at J.C Penney (NYSE:JCP) last year, investor hopes were lifted to believe that the company could get back to its glory days. Ron Johnson came in with a wealth of turnaround experience gained from his time at Apple (NASDAQ:AAPL) and Target (NYSE:TGT). However, investors have been waiting for the company to maneuver a turning point over the last twelve months without major success. Promising expectations have been exhibited quarter after quarter, but the elusive turnaround continues to shift to another point ahead like a mirage.

J. C. Penney operates department stores in the United States and Puerto Rico. It sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings. The Plano, TX-based company also provides various services, such as styling salons, optical, portrait photography, and custom decorating. The company offers various products and services online via its website, a platform that has been the nursery for industry giants like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). Its direct rivals include Kohl's (NYSE:KSS) and Macy's (NYSE:M), among others.

J.C Penney's most recent quarter results least impressive among peers

The company announced December quarter results on Wednesday, February 27, an event that sent the company's shares down the charts at Wall Street. The company's sales and revenues declined shamefully by huge margins. Revenues were down 25 percent for the quarter while Internet sales dipped 34 percent. On the other hand, Macy's online business soared 48 percent and looks set to take over what J.C Penney leaves behind.

Last year, J.C Penney sent home 19,000 staff, and recently trimmed its workforce by 2,200 employees as it sought to cut fixed costs following a tough campaign. Customers are losing trust in the Texas-based company despite the massive experience garnered over the years. The company did not impress in terms of market share, with fewer than 17 percent approaching the retailer's stores.

Contrary to J.C Penney, Macy's Q4 results tramped analyst expectations with sales increasing by 7.2 percent year-over-year to $9.35 billion. This included the extra weeks in the 2012 calendar. However, the management noted that, comparing the same number of weeks as 2011 sales grew by 3.9 percent. Operating income, excluding store closing costs and impairments in the quarter, was approximately $1.4 billion or nearly 15 percent of sales, up 11 percent year-over-year.

Target has done well with its specialization in clothing and apparel. The company has managed to confront the ghost of competitive pricing from Amazon, which puts it in a position to attract budget customers. For the most recent quarter ended Feb. 2, Target earned $961 million, or $1.47 per share, down from $981 million, or $1.45 per share, reported last year. Revenue increased by 7 percent to $22.73 billion from $21.29 billion, a year ago, which was in line with street expectations. Target full year earnings came at $3 billion, or $4.52 per share compared to 2011's $2.93 billion, or $4.28 per share. Adjusted earnings were $4.76 per share. The company's annual revenue was up 5 percent to $71.96 billion from $68.47 billion.

Menominee Falls, WI-based Kohl's reported earnings on February 28, beating analyst estimates. The company reported revenue of $6.34 billion, in line with the consensus estimate. The company's GAAP sales were up 5.4 percent from last year while earnings came at $1.66 per share- 4 cents above the consensus estimate. Nonetheless, this was a decline from last year's EPS of $1.80. Operating and gross margins (GM) also dipped significantly, with GM shedding 290 basis points to settle at 33 percent while operating margin was down 260 Bps to 10.8 percent. Just like J.C Penney, Kohl also provides on-line shopping through its website, Kohls.com.

This turnaround is becoming a mirage

Every other quarter, there has been a strong message from J.C Penny, insinuating optimism for a turnaround. So far, this has been fruitless, and the company has resolved to selling products at a loss in desperation to remaining liquid. J.C Penney has been bleeding cash over the recent past, a situation that has also forced the company to employ some delaying tactics in paying vendors. The concept here is getting as much cash as possible within the shortest period, while taking as long as possible to make payments.

The company is indeed trying to work on its cash cycle, albeit without major success. Ron Johnson may need to borrow some knowledge from his previous success with Target, in order to mitigate J.C Penney's woes. The CEO has about six months to weave a solution, which could spark J.C Penney's miraculous recovery from its death bed.

However, just as revealed, J.C Penney faces more than the internal challenges of margins and costs. The company's industry is facing the challenge of a lifetime, with retailers being forced to discount their products in order to compete with the likes of Amazon and eBay. The challenge from Kohl's, Macy's and Target, is not to be ignored either while Wal-Mart (NYSE:WMT) continues to maintain its status as the market leader outside the cyberspace.

The bottom line

J.C Penney can draw a sigh of relief from analysts who continue to rate its stock as Buy or equivalent. The company's best price target over the last three weeks came from Oppenheimer, who reiterated the Outperform rating with a target of $30 on February 28. The lowest target came from UBS AG who rated the stock as Neutral, with a price target of $10. This is a massive spread in target price, of about 200%, which raises question marks on the valuation methods used by the analysts.

Nonetheless, J.C Penney's future rests on the shoulders of Ron Johnson as he must find a way of getting to that elusive turnaround amidst the toughest of situations. If he can perform the recovery miracle, the Buys have it. However, the opposite seems to be the most likely, which could push the company to privatization,and follow in the expected footsteps of Dell and Best Buy.

J.C Penney is standing at the shores of the river of death determined to cross over to the other side (salvation). Unfortunately, the cargo seems too heavy for the raft captain (the CEO) to maneuvre a successful journey. Some of the crew have already departed (a click of directors selling-off their shares) as they fear that the raft could capsize at the middle of the river.

At this point, even shorting the stock might not be an option as opportunity cost outweighs any benefits. The industry has better options in store, like buying Macy's for that matter. Nonetheless, if you must own this stock, then being short is a safer option. Otherwise, it won't hurt to wait for the unlikely turnaround.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.