JCPenney: Is JCP Stock a Buy Before Earnings?

For the brave of heart, JCP stock could be a spec play

By Susan J. Aluise, Aviation, Auto & Transportation Writer
jcp stock jc penney store

Source: Mike Mozart via Flickr

All eyes will be on J C Penney Company Inc (NYSE:JCP) this week, as the 113-year-old retailer reports fourth quarter earnings on Thursday. The biggest question: Has a string of strategic changes — ranging from another CEO switch to a plan to bring back the iconic retailer’s print catalogs — begun to lift the flagging fortunes of JCPenney and JCP stock?

jcpenney jcp stockJCPenney’s business model and leadership have sustained seismic shocks over the past five years, so it’s easy to understand conservative investors’ reticence to go all in on JCP stock. Bearish fears that the stock will take a hit after earnings is one reason JCP stock has seen an unusually high volume of put options recently.

Any prudent investor should keep an eye on three potential headwinds — margin pressure, lower operating cash flow and total debt of $5.43 billion — and assess their appetite for risk before going all-in on JCP’s turnaround.

Still …

Although the rapid pace of change and the volatility of JCPenney are not for the faint of heart, here are three reasons growth-oriented investors should check out JCP stock before its earnings report:

  • Improving Sales, Earnings: Wall Street is looking for JCPenney earnings of 11 cents a share on a top line of $3.86 billion for the fiscal fourth quarter. JCPenney surprised some analysts in Q3 with a 60% year-over-year boost in net income. Despite underwhelming Black Friday traffic, JCPenney’s fourth-quarter comps are expected to have grown by more than 3.5%.
  • New CEO Marvin Ellison: Ellison, who is slated to take over as CEO from Mike Ullman on Aug. 1, is a heavy-hitter in omnichannel, supply chain and technology — game-changing capabilities in the hotly competitive retail space. At Home Depot Inc (NYSE:HD), Ellison spearheaded a turnaround of the chain’s 2,000 stores. Ellison, who earlier in his career did a stint at rival Target Corporation (NYSE:TGT), is comparatively light on softlines merchandising experience. That said, he has a proven track record as a quick study and brings energy and confidence to bear in his management style. Also, Ullman’s not riding off into the sunset yet — he will stay on as executive chairman for another year.
  • After the Aftershocks: JCP stock still has not shaken off the hangover from the 17-month binge with former Apple Inc. (NASDAQ:AAPL) Store wunderkind Ron Johnson — an epic fail that led to Mike Ullman’s second tour of duty as CEO. In 2012 alone, Johnson’s radical reboot of JCP’s strategy to dump beloved brands, discounts and coupons, lost one-fourth of JCPenney’s sales, triggering an operating loss of nearly $1 billion. But the good news: JCP stock has gained 33% year-to-date, and for new money, it’s hard not to love a price/earnings-to-growth ratio of 0.12.

Bottom Line

Even the strongest retailers are experiencing headwinds that range from cautious consumer spending and shipping rate hikes to terrorist threats against shopping malls.

Still, the risk-reward equation of buying JCP in hope that the stock will rebound over the course of 2015 makes more sense for a growth-oriented investor with a higher risk tolerance who doesn’t mind this stock’s extreme volatility.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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