Making a Case for JC Penney

by Beth Gaston Moon | February 24, 2012 10:03 am

Making a Case for JC Penney

For some reason, I really want to root for J.C. Penney (NYSE:JCP[1]). It could have folded years ago, along with the virtual collapse of the department-store model as we know it. But instead of going gently into the proverbial good night, JCP continues to reinvent itself.

I don’t shop there. I live in the city of Chicago, I’m car-less, and the closest store is more than 11 miles away in the suburbs (11 miles in Chicago is like 50 in Southern Illinois, where I used to live). But that’s part of the reason I root for the company.

Penney doesn’t feel the need to commit itself to pricey real estate in an area flooded with choices such as H&M, Forever 21, Old Navy, and Aeropostale. The company focuses its efforts on communities that need a J.C. Penney. I have been in more than one suburb or small town where J.C. Penney is one of the only places residents can shop for clothes or housewares.

This is one part of the JCP business model that hasn’t changed in the chain’s 110-year history. Its founder, James Cash Penney, built his first stores in “inexpensive locations in small communities.”[2]

JCP is a bit of an underdog, however. Year-over-year, earnings per share have dropped 24%. In the third quarter, JCP lost 67 cents per share, while same-store sales slipped 1.6%. The stock’s P-E ratio of 33.3 is a bit bloated compared to many competitors and the consumer-services average of 23.3. The company announced layoffs last month.[3]

But wait…there’s more. In the past five years, JCP has lost half its value. Just this week, Fitch Ratings slapped the retailer with a credit downgrade. And not just a garden-variety downgrade: Fitch lowered JCP’s rating to BB-plus[4], more casually known as “junk.” Rubbing salt in the wound, the ratings agency said it has doubts as to whether JCP can “lift sliding sales and improve its profitability.”

This morning, Penney announced a fourth-quarter loss[5] of 41 cents per share, down from a net gain of $1.13 per share last year. Excluding items related to restricting and other charges, though, JCP banked per-share results of 74 cents — seven cents better than analysts’ consensus view.

Total sales dropped almost 5%, to $5.43 billion, shy of the $5.5 billion expected by analysts. Comparable-store sales slipped 1.8% in the reporting period. Company officials reaffirmed their guidance for FY13.

Even though the company has all of these fundamental battles to fight, I have hope for the stock. Maybe it’s the chain’s clever new commercials[6], or maybe I like the comfort of brands that stick around for longer than a century.

On the chart front, the stock is near its 52-week high and consolidating into potential support from its 20-day moving average. What’s more, more than one-fifth of the stock’s float (the shares available for trading) has been sold short. This creates a situation ripe for a short squeeze should JCP continue to move higher.

What are your thoughts on JCP. Does it have the power to fight back or is it doomed to stay a sector laggard?

Endnotes:
  1. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  2. “inexpensive locations in small communities.”: http://www.nps.gov/nr/twhp/wwwlps/lessons/walker/WAfacts2.htm
  3. The company announced layoffs last month.: http://investorplace.com/2012/01/jcpenney-jcp-to-cut-thousands-of-jobs/
  4. Fitch lowered JCP’s rating to BB-plus: http://www.cbsnews.com/8301-505245_162-57381949/fitch-drops-j.c-penneys-credit-rating-to-junk/
  5. Penney announced a fourth-quarter loss: http://online.wsj.com/article/SB10001424052970203918304577243001603617874.html
  6. clever new commercials: http://www.youtube.com/watch?v=hUzH2t9jUI4

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