by Tom Taulli | September 30, 2013 1:30 pm
Last week was absolutely brutal for the shareholders of the beleaguered retailer JCPenny (JCP). The shares lost about 30% of their value and are currently going for under $9.
One reason for the plunge was an unexpected secondary offering of 84 million shares at $9.65 each. And there may be even more to hit the market since Goldman Sachs (GS), which managed the transaction, has the right to buy another 12.6 million shares of JCP stock.
Will this injection prove effective and provide enough breathing room for JCPenney to get back on track? Or is the company really just doomed? To see, let’s take a look at the pros and cons:
Back to Basics. Ron Johnson’s tenure at JCPenney will go down as one of history’s worst corporate performances. He took a “shock therapy” approach and abruptly changed the layouts of the stores, added upscale merchandise and eliminated discounts. It turned out to be too jarring for customers, who ultimately went to rivals. But the current CEO Myron “Mike” Ullman has wasted little time returning JCP back to its roots. He has restocked the stores with its traditional products and also reintroduced coupons and promotions.
Improving Fundamentals. Last week, JCP put out a terse press release that said it is “pleased with its progress thus far in the Company’s turnaround efforts and the traction its initiatives are starting to achieve.” It also noted that the forecast is for positive comparable store sales in the third and fourth quarters and that online sales are going strong. The company’s losses are expected to be trimmed dramatically next year as a result.
Valuation. JCP is trading at only 0.16 times overall sales — a bargain if you believe in the store’s recovery. This compares to Macy’s (M) and Kohl’s (KSS) at multiples of 0.6. Something else: JCP still has some heavy-hitters that are long the stock, including George Soros, Richard Perry of Perry Capital and Kyle Bass of Hayman Capital as of the most recent SEC filings.
Leverage. Back in May, JCP agreed to a $2.25 billion term loan facility, which was secured by liens on the headquarters, distribution centers and certain stores. In all, the company now has about $5.82 billion in outstanding debt obligations. Because of this, there continues to be a high risk of default, as Goldman Sachs analysts warned last week. And either way, the heavy debt load means JCPenney will have fewer resources to devote to new merchandising strategies, technologies (such as mobile and e-commerce efforts) and marketing campaigns.
Competitors. JCP must fight against many rivals that are in much better financial position, such as Target (TGT), Macy’s, Kohl’s, TJX Co. (TJX) Gap (GPS) and Ross Stores (ROST). If the economy remains fairly sluggish, these operators may be more inclined to offer promotions and discounts, which would put even more pressure on JCP. There is also the secular trend of e-commerce, which could send value-driven shoppers to companies like Amazon.com (AMZN).
Morale. With the grim headlines, it must be pretty tough for JCP employees to be upbeat. Already the company has engaged in a wrenching cost-cutting program, which has resulted in a drastic reduction of the workforce. While the company had little choice in the matter, the impact could mean further deterioration in customer service and quality control.
Current CEO Ullman is in a extremely tough spot, as Ron Johnson has appeared to do lasting damage to JCP. Now the company is fighting to get back its loyal customers and keep employees focused on their jobs, while also finding aggressive ways to maintain liquidity.
While there are some encouraging signs, the fact is that the JCP recent “guidance” is vague. More importantly, JCPenney’s positive comments the day before it pulled off a capital raise — and after the stock slid big-time. What would you expect JCP to say?
For the most part, JCPenney stock is for those who are looking for a short-term trade. But for those investors that are focused on the long-term, it will likely be tough to avoid losses. Thus, the cons outweigh the pros on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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