Short J.C. Penney

| About: J.C. Penney (JCP)

Summary

J.C. Penney still manages to generate a tremendous amount of revenue. But retail is a low margin business, and the company's meager EBITDA better reflects its value.

J.C. Penney is still expensive on the EV/EBITDA metric, and this is because of its heavy debt load.

The company has weak interest expense coverage, and this problem could worsen in a rising rate environment.

The retail industry is under pressure due to online competition and changing consumer behaviors. The market has given retail equities a steep discount because of these headwinds. And J.C. Penney (NYSE:JCP), with revenue over five times its market cap, may look like an enormous value opportunity.

However, don't be fooled. JCP's massive debt load, poor liquidity, and declining revenue make it still look expensive when considering the industry's challenges. The company also has poor debt coverage, and debt coverage is crucial in a rising rate environment.

Short J.C. Penney

JCP's operates 1,021 department stores in the United States. And the business is divided into eight segments that have remained consistent for the last three years.

Women's apparel

25

%

26

%

26

%

Men's apparel and accessories

22

%

22

%

22

%

Home

12

%

12

%

11

%

Women's accessories, including Sephora

12

%

11

%

10

%

Children's apparel

10

%

10

%

11

%

Footwear and handbags

8

%

8

%

9

%

Jewelry

6

%

6

%

6

%

Services and other

5

%

5

%

5

%

100

%

100

%

100

%


Sales are further divided into online and retail, and online sales are expected to be JCP's growth engine while retail sales decline. In fact, the company is planning to close over 10 percent of its physical locations in the next year alone.

Revenue is still a staggering $12 billion, down from a peak of around $30 billion in the early 2000s and $17 billion in 2010. Despite this precipitous decline, JCP's top line is not in free fall. Sales appear to have stabilized in 2014 and are now making a tentative recovery. The company's market cap of around $2 billion gives it a P/S ratio of only 0.15, and this suggests the market is not hopeful about JCP's future sales growth.

Still Expensive

Don't let that low P/S make you think JCP is cheap; it's not. When we consider JCP's long-term debt of $4.6 billion (and cash of $880 million), we get an enterprise value of $5.64 billion, and an EV/EBITDA of around 5x - down from almost 10x at the start of the year. It is little surprise that investors who bought JCP stock for 10x EV/EBITDA were bitterly disappointed in the following months. JCP's debt is a real problem, and the market can't ignore it.

JCP's has EBITDA of $1 billion TTM. EBITDA is calculated before interest expense, so this is a good way to visualize JCP's debt repayment ability. JCP's interest expense of $360 million dwarfs free cash flow. And the $1 billion EBITDA is only 2.7x the interest expense: This puts JCP firmly in the danger zone regarding debt coverage. This problem is especially pertinent in a rising rate environment.

Conclusion

JCP may look cheap if you only consider the topline numbers and ignore the debt. However, when the debt is considered, JCP looks rather expensive on a 5x EV/EBITDA. The company's EBITDA of $1 billion is only 2.7x greater than its interest expense, and this coverage may get worse in a rising rate environment. There is a strong bearish case for JCP, and the stock should be sold, avoided, or shorted.

Disclosure: I/we 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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Department Stores
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here