JCP Stock Is a Better Buy Than Its Earnings Response Suggests

JCPenney pulled back after Wednesday's Q1 report, but the end zone is still in sight

jcp stock jc penney store

Source: Mike Mozart via Flickr

Calling a spade a spade, the turnaround effort at J C Penney Company Inc (NYSE:JCP) is indeed getting traction. On the flip side, it has been like watching paint dry, and JCP stock holders are getting restless waiting for convincing growth.

jcpenney jcp stockWell, the pace of progress might have picked up a bit more last quarter than the market appreciates.

Although JCP stock moved into the red following Wednesday’s post-close earnings report, a deeper look at the numbers — past, present and future — seem to reveal that the end zone is closer than many realize.

That’s not to say JCPenney is on the cusp of restoring its powerhouse status it enjoyed as recently as 2007. But it is to say that JCP stock may be a bargain for investors that can look more than just a few months down the road.

JCPenney Earnings by the Numbers

In the first quarter of 2015 (fiscal 2016), JCPenney stores did slightly better with the shopping crowd. Overall sales for the retailer were up 2.1% on a year-over-year basis, reaching $2.86 billion. That was slightly less than the $2.87 billion in revenue analysts were collectively expecting. Same-store sales grew 3.4%, just missing expectations of 3.5%.

Still, JCP was able to impress where it mattered more — on the bottom line. The loss narrowed to just $173 million during Q1, translating into a loss of 55 cents per share of JCP stock. That’s leaps and bounds better than the loss of $1.16 per share booked in the same quarter a year earlier, and considerably better than the 76-cent loss the pros were looking for.

The progress wasn’t the mere result of some fortuitous accounting, either. Gross margins grew to 36.4%, up from 33.1% in the first quarter of 2014 (fiscal 2015), and up from 33.8% in the fourth quarter of last year.

JCP Raises the Bar

Despite coming up short on the sales front last quarter, JCPenney upped its full-year sales outlook. The retailer now expects same-store sales to grow between 4% and 5% in 2015, up from a previously suggested range of a 3% to 5% increase in same-store sales.

The company anticipates that higher top line to lead to a stronger bottom line as well. JCP suggested its 2015 gross margins should grow between 100 and 150 basis points above last year’s overall gross margins of 34.8%.

It’s not a mere pipe dream, either. JCPenney is adding, re-adding, and revamping its venues and product selection to get back in the groove it was in before peaking in 2007.

For instance, in March the company mailed a home-goods catalog for the first time in five years. And it’s starting to yield results. It’s also widening the reach of its Sephora beauty brand. Already a growing draw to stores, JCPenney said it plans on launching an online sales channel for the cosmetics name.

What Does It Mean for JCP Stock?

While the top line is admittedly growing at a disappointing pace and the company is still booking losses, the market may be overlooking the “just barely” nature of those losses.

A loss of $173 million on $2.86 billion in revenue translates into net margins of only -6.1%. For comparison, in fiscal 2014 (calendar 2013), JCPenney lost $1.7 billion, posting net margins of -14.5%.

It’s a rate of progress that puts a swing back to a full-year profit on the foreseeable radar by a finite point in time: fiscal 2019, or calendar 2018, to be specific. Reuters says the retailer is apt to earn 25 cents per share that year.

And considering that JCP has topped estimates in five of the past six quarters, one can’t help but wonder if the retailer will swing to a profit slightly ahead of schedule.

Most investors wouldn’t normally have that kind of patience waiting for a profit, save a biotech working on a breakthrough drug. In many ways, however, JCP stock is like a biotech stock with a great therapy in its pipeline. The odds of eventual success are high, and being a well-watched stock with a constantly recalculated risk/reward ratio, the market is apt to reward JCP as it reaches certain milestones en route to permanent profitability.

In other words, JCP stock might not be sexy, but it’s worth the wait, and it’s worth getting into now rather than later — even if most of the market doesn’t yet see it.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/jcp-stock-buy-jcpenney-q1-earnings/.

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