J.C. Penney Still On A Quest For Respect

by: Kevin Donovan


Missing on the top line keeps a lid on share price.

But chances still good for holiday vindication.

Hitting forecasts should boost confidence and stock price.

In his conference call with analysts Wednesday, CEO Mike Ullman says the J.C. Penney (NYSE:JCP) customer "likes to have a department store atmosphere; she wants to be respected." He probably wishes as much for the company's stock price. Getting it will take meeting a sales forecast at some point.

After running up sharply prior to the second quarter earnings report, JCP shares retraced the gains in a selloff fueled by yet another shortfall on the top line. The company has done a remarkable job of stanching the flow of earnings losses, logging positive EBITDA and cash flow and expanding gross margins. However, falling short on sales expectations continues to dog the broadline retailer.

We liked the stock when it was at $11 and we still liked it at $7, so we're hanging on, believing that at some point sales will grow and force short sellers into covering as Penney's road to profitability becomes clearer.

Perhaps lowballing guidance would be a help, but better yet, a strong Christmas selling season would do much to succor bulls and scare the bears. We still think U.S. holiday spending driven by lower gasoline prices and job gains will be robust and that Penney will garner its share of the mid-tier market it targets.

Meanwhile, the company reported sales of $2.764 billion in the third quarter, down from $2.779 billion in the third quarter of 2013. Notably, same-store sales were flat, while the market had been looking for low single-digit gains.

Still, a 710 basis point improvement in the gross margin to 36.6%, due in large part to lapping last year's clearance discounts, cut Penney's adjusted net loss to $0.77 per share, $0.03 better than the consensus estimate and a world away from the $1.81 per share loss a year ago. EBITDA was $102 million, a $342 million improvement from the same period last year. EBITDA for the quarter included a gain of $88 million related to the sale of certain store assets.

In a press release, the company said home and fine jewelry were among the company's top performing merchandise divisions in the quarter. Sephora inside J.C. Penney also continued its strong performance. Geographically, the western and northeastern regions of the country delivered the best performance, it said.

Interestingly, on the conference call Mr. Ullman said Penney believed it could make inroads in the healthy and growing handbag market.

Inventory was $3.358 billion, down 10.4 % compared to the same quarter last year. Penney said it was pleased with the level and content of its inventory heading into the holiday season.

As difficult as it is to value Penney at this stage, we'll take a stab at it. The shares currently sport a price to book value less than 1.00 and a price-to-sales ratio of just 0.19, well below the average of the consumer discretionary sector's bottom quintile figures as calculated by Ned Davis Research. If Penney can meet or beat its fourth-quarter guidance of 2-4% growth in same-store sales, we think the shares could be re-rated. Using a price to book multiple of 1.8, which we would deem reasonable for a company on the path to turning profitable, we derive a share price of about $14, close to double the current price.

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.