The retail sector has been slammed so far this year, as the majority of industry participants reported dismal fourth quarter results due to worse than expected holiday sales. However, J C Penney Company Inc. (JCP) bucked that trend and proved that the once nearly bankrupt department store is on a solid path to recovery.
The firm’s increasingly impressive turnaround story has grabbed investors’ attention and caused JCP to rise over 40% so far this year.
The firm’s fourth-quarter results inspired confidence among shareholders, especially considering the current climate in the retail space.
In sharp contrast to rival Macy’s Inc.’s (M) results, JCPenney was helped by strong sales during the holiday shopping season, and the firm saw its total sales rise 2.6% to $4 billion in 2015.
JCP’s earnings report also revealed optimistic projections for the future, with the firm expecting to see a 3% to 4% rise in same-store sales and a 40-to-60-basis-point rise in gross margin throughout the coming year.
2016 Is a Big Year
While JCP has struggled in the past, the company’s plans for 2016 are likely to add to the firm’s turnaround story. Under CEO Marvin Ellison, the company has been focused on expanding its signature brands. The firm partnered with Disney on its Okie Dokie brand last year to produce children’s garments featuring artwork from favorite movies like Frozen and Cinderella.
This year, the firm is continuing its efforts to grow its in-house brands, as they provide better margins.
Another of Ellison’s objectives has been returning the store to its roots after previous CEO Ron Johnson tried to make over the store’s image by aiming more upscale and removing sales in favor of lower general prices.
Ellison has wiped out most of Johnson’s changes, instead targeting low-income shoppers with bargain priced, signature labels. This strategy appears to be working for JCP and will provide some protection against economic uncertainty in the coming year.
Many are beginning to worry that economic growth is beginning to falter in the U.S., but JCP’s focus on bargain shoppers could insulate the firm somewhat if macroeconomic tides take a turn for the worst.
This year, JCPenney is also planning to launch a new, Black Friday-esque marketing campaign in which many of its fashion items will be offered for just one cent in order to increase foot traffic. While the campaign will force JCP to sell some items at a loss, the firm is hoping that getting customers through the door to see how the store has changed will be worth it.
JCPenney is also working to change up its displays in order to make impulse buys easier and more appealing so it can capitalize on the shoppers drawn in by the sales.
Still Some Uncertainty for JCP
However, JCP stock isn’t all upside. While there is merit to its turnaround story, the firm is still on shaky ground. The company is carrying around a worrying amount of debt and its debt-to-equity ratio of 3.4 is cause for concern.
On the bright side, the firm’s brush with financial ruin has created a culture of disciplined cost management, and JCPenney has been paying down its massive debt little by little. If the company can keep up its improving sales figures this year, more free cash flow will be generated, which in turn will give JCP a chance to pay down more debt. That will lower interest payments, thus freeing up even more cash for debt repayment.
In an ideal scenario, JCP has a good chance of continuing with this very positive cycle in 2016.
Another reason to be cautious about investing in JCP stock is the firm’s lack of mobile and online offerings. While JCPenney is planning to improve its mobile application and online shopping options this year, the company is far behind most of its peers in improving customers’ web experience. This could be a major stumbling block for the firm, especially as the department store sector has been severely damaged by growth in e-commerce.
The bottom line is that JCP stock looks like a solid long-term pick for investors who want to add retail to their portfolio. There is still some risk that the firm’s turnaround plans will be thwarted by economic headwinds and changing customer behavior.
But so far, it appears that Ellison’s efforts have been successful in resuscitating the business, and this year could be a bumper one for JCP shareholders.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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