JCP Stock: The Exodus Is Overdone

Just when you thought it was safe to go into JCPenney (JCP) stock, the retailer has thrown investors a curveball.

JCP stock, JCPenney stockDuring an analyst day on Wednesday, company execs revised third-quarter comparable-store sales guidance lower, leaving investors disenchanted and sending shares lower by 10%.

The latest development came as a blow to shareholders who have been cheering the beleaguered retailer’s progress, as it casts a cloud around the turnaround story.

Clearly the revised sales forecast is a setback for a retailer that under the leadership of Mike Ullman has been showing such promise, evidence by the return of discounts and private-label brands that shoppers were deprived of under a Ron Johnson-led JCPenney.

However, once you take a step back from the selling frenzy, you you may gain a different perspective. The struggles this retailer is experiencing are no different than those facing the retail industry more broadly and are not something extraordinarily unique to JCP.

As a result, today’s selling in JCP stock might have been a smidgen overdone.

Window of Opportunity 

First the bad news. JCPenney now expects same-store sales to advance in the low single digits compared to previous guidance calling for an increase in the mid-single digits. This not only falls shy of company guidance, but trails analyst expectations of 5.3% growth, according to Bloomberg.

The retailer blamed weaker September sales than anticipated in conjunction with lower clearance levels and a tough overall environment for retail — none of which are doom-and-gloom scenarios. Plus, full-year 2014 guidance calling for comparable-store sales growth in the mid-single-digit range in addition to positive free cash flow was left intact.

However, if you’re looking for a takeaway from JCPenney’s analyst day, let it be the fact that the company provided something that in recent years (as a function of strategy failures and leadership changes) it has been unable to offer: long-term guidance.

Execs outlined the company’s financial goals for the next three years, which is a far cry from withdrawing profit guidance like the retailer was forced to do under Johnson.

JCPenney is calling for sales of $14.5 billion in 2017 in addition to an opportunity to capture $1 billion in additional market share growth. It’s looking to e-commerce and women’s accessories to lead the way. The latest revenue projections compare to $11.9 billion in total sales reported for fiscal year 2013. The retailer, which has been trying to return to profitability, also is calling for $1.2 billion in EBITDA in 2017 to accompany what company execs characterize as a “conservative” estimate of a 36.5% gross margin — a level that has eluded the retailer for years.

So if things aren’t that bad for JCP stock, what prompted the investor exodus?

Keep in mind that JCPenney lowered its comp-store sales guidance in response to sales for a month that contains back-to-school sales, which should’ve been a bright spot for the retailer. Also, its chief rival Sears Holdings (SHLD), whose future is even more uncertain than JCPenney’s, will no longer be competing with apparel, leaving the opportunity for others to capture market share.

Nonetheless, low-single-digit comparable-store sales growth is a far cry from the double-digit declines that JCPenney was experiencing not that long ago, and the retailer has been giving customers what they want in terms of deals and private-label brands.

Conclusion

It has been no secret that JCPenney is on the road to recovery. As with any company that might be undergoing a corporate restructuring or worse, setbacks and challenges are to be expected. However, for those investors who have rode out JCP stock this far, the best of days seem to be ahead for this retailer. Bailing now would just seem premature.

As for those who are looking to get in, you just got a deal of your own in the form of a buying opportunity.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/jc-penney-jcp-stock-exodus/.

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