Yahoo Finance’s Jeff Macke appeared on Breakout on Thursday afternoon before the release of JCPenney earnings to suggest that Mike Ullman has bought the company a little extra time, but that’s about it.
In his words, Mike Ullman is “trying to get JCP back to being a mediocre department store that’s kind of dying very slowly instead of very fast.” That can’t be good for JCP stock.
However, the reports of JCPenney’s (JCP) death have been greatly exaggerated.
JCP stock finished Friday up roughly 13% on very heavy trading after reporting anything but mediocre Q1 earnings. In the conference call, Ullman let investors know the first two phases of its turnaround plan were complete. It’s now moving into the third phase, which involves returning JCPenney to long-term profitability.
Skeptics like Macke might see the glass more than half empty, but others such as myself see a business that’s come a heck of a long way in just one year. It’s important to remember just how badly bruised JCPenney was when Ullman took back the reigns on April 8, 2013. In the 17 months Ron Johnson ran the company, JCP stock went from a high of $43.18 in February 2012, four months after taking the top job, to a low of $14.10 just days before his dismissal when keeping the lights on at JCPenney was very much in question.
My editor asked me today if I thought JCP was going to stick around longer.
The short answer? Well, here are my exact words from my email reply:
“I do. Sears traffic will go to JCP and Roger Farah or whomever will ensure it lasts another 100 years. It’s not out of the woods by a long shot but vendors are not going to turn away JCPenney business at this point. It’s turning whether Jeff Macke wants to believe it. Bringing back the private label is really helping along with Sephora. Little steps will turn into big steps. That’s how you turnaround a company. You get staff believing again and you’re off to the races.”
But just to make sure you understand why I feel this way, let’s take a look at the major points I covered for JCP earnings previews in both the fourth quarter and this quarter, and how they’ve shaped up. There are seven points overall, and each encourages continued faith in JCPenney:
- Online Sales. JCPenney’s online sales in Q1 2013 were $217 million, a 19.9% decrease year-over-year. This year it increased online sales by 25.7% to $273 million, or 9.7% of overall revenue. While it didn’t quite hit my target of 10%, it’s close enough. I expect it do push into double digits in Q2.
- Private Label. As Ullman stated in its conference call, it’s almost back to where it used to be at 50% of revenue. St. John’s Bay is back as if it never left and Liz Claiborne is getting the attention it deserves. With private label boosting gross margins by several hundred basis points, you can expect that to help JCP stock in the future.
- Liquidity. This is the one that Jeff Macke and company are most concerned about and so they should be. You can’t run a company if you don’t have enough cash to meet your obligations. This past year, liquidity never went below $1 billion and this year CFO Ed Record believes it won’t go below $1.5 billion — evidence it’s making progress. More importantly, suppliers continue to be supportive of its turnaround efforts, and that’s key to maintaining liquidity.
- Gross Margins. I specifically stated in my Q4 JCP earnings preview, “As long as they can move above 30% in the next two to three quarters, JCP’s survival is less in doubt.” JCP delivered gross margins of 33.1% in Q1, 230 basis points better than a year earlier, and it expects to go even higher in Q2.
- Sears. Both Kohl’s (KSS) and Macy’s (M) experienced negative same-store sales growth in the first quarter. Sears (SHLD) doesn’t report until May 22, but we can assume that its earnings going to be dismal as usual. JCP is taking back some of the market share it lost during the Ron Johnson debacle. It probably won’t get all of it back, but it’ll be enough to turn a profit, and that’s all investors need to push JCP stock even higher.
- Management Enthusiasm. Mike Ullman’s first sentence out of his mouth in the conference call was how enthusiastic the entire management team is about the rest of the year. The turnaround will be complete by the end of the year, when it can get down to the business of selling goods. The entire company should be excited. It’s not very often you bring the dead back to life.
- Succession. According to Ullman, there are no “major changes” on the horizon. So, either Mike Ullman is a really good poker player or he’s in this past 2014. While I’d love to see Roger Farah as CEO and Ullman as executive chairman, I can live with Ullman as the top dog. After all, he was the one performing mouth-to-mouth on the patient this past year. He’s earned the right to stick around and put JCP stock on even better footing.
On virtually every point I’ve written about over the past four months, JCPenney has provided a positive response.
It’s hard for me not to be optimistic about JCP stock going forward.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.