On Thursday, shares of J C Penney Company Inc (JCP) shot up nearly 8% as investor sentiment surrounding the stock improved. The beaten-down retailer offers a good comeback story for traders who want to add retail to their portfolios, but its extremely high debt burden has been a big red flag for many.
However, on Wednesday JCP proposed the refinancing of a $2.25 billion secured term loan, which would free up more cash and push back the loan’s maturity.
This helped improve investors’ view of JCP stock, as did a report that the retailer’s comparable store sales continued to rise in the second quarter.
Although JCPenney stock is plagued by a massive debt load that has been following the company around for years, JCP bulls point out that it has successfully reduced its debt from $5.6 billion to $4.8 billion over the last two years and has solid plans to continue on that trajectory.
JCPenney’s brush with bankruptcy created a conservative culture that has helped the retailer continue to pay down its debts. The company has promised to continue using free cash to reduce its debt burden, which will in turn free up even more cash by lowering JCP’s interest payments.
Wednesday’s announcement served as reassurance that the company is on track to deliver on its promises to lower its debt load in the coming years. If JCPenney is able to refinance the $2.25 billion loan as it has proposed, the interest expense savings will be another factor that could contribute to earnings growth in the coming year.
JCP Stock’s Primary Attraction: Sales Growth
One of the biggest reasons to invest in JCPenney is its impressive sales growth despite the challenging retail climate. The company has closed down several stores in an effort to reduce costs, but despite that, its sales have grown consistently for two years. JCP has said it sees sales rising 3% to 4% in the coming year, and so far, the retailer appears to be delivering.
JCPenney has gone through a major revamp in an effort to draw in more customers and generate more cash. The most recent sales figures suggest that those efforts have been successful so far.
JCP is trailing the sales of appliances at several stores and adding Sephora boutiques to many locations in order to increase foot traffic. The company is also planning to improve its hair salons as many salon clients also buy things in-store when they come in.
A Buying Opportunity
While there is still a lot of risk associated with buying JCP stock, it makes for a good buying opportunity. The retailer is in the midst of an impressive comeback that, if successful, could cause the stock to double over the next two years.
This week the company proved that it was staying on track and delivering on promises to turn things around, which is a good sign for the future.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
