J C Penney Company Inc (JCP): It’s Make-or-Break Time

It hasn’t been easy to be bullish on J C Penney Company Inc (NYSE:JCP) of late. Aside from the fact that the once-iconic department store chain is still fighting for its life after now-former-CEO Ron Johnson ran it into the ground in 2012, brick and mortar retailing as a category in itself has run into an undeniable headwind.

J C Penney Company Inc (JCP): It's Make-or-Break Time

Indeed, of the 15 subcategories Retail Metrics monitors, department store chains are the only group expected to have collectively taken losses in Q2. They’ve become such a tepid draw, mall operators no longer want most of these (what used to be called) anchor stores.

Yet, with JCP stock up 37% year-to-date and up 94% since early 2014 — when many assumed JCPenney was beyond salvaging — clearly, some glimmer of hope is shining. Could Friday’s earnings report prove the company is over the hump?

JCPenney Earnings Preview

As of the latest look, analysts expect JCPenney to post a loss of 15 cents per share on revenue of $2.93 billion. Although it is still a loss, that’s a drastic improvement on the loss of 41 cents per share of JCP stock reported in the same quarter a year earlier, when it generated $2.88 billion worth of sales.

JCPenney has topped earnings estimates in nine of its past ten quarters. Moreover, each quarter’s earnings have shown year-over-year improvement since 2015.

Current CEO Marvin Ellison, who came from Home Depot Inc (NYSE:HD), took the helm from CEO from Myron “Mike” Ullman in August of last year, aiming to continue the turnaround work Ullman began when he took over — for a second time — in April 2013, mostly to undo the damage Ron Johnson had done.

Yet, Ellison arguably put that turnaround effort on steroids.

A year since he has taken over, Ellison has taken some decidedly advantageous actions. One of them is developing a clear profile of the company’s 87 million regular customers, with the aim of extracting more revenue from them. Another is the promotion of higher-margin, private brands. Still another is a much better omnichannel platform. But, perhaps more than anything though, Ellison has connected with store employees, getting them on board with his vision.

Regardless of the numbers JCPenney posts on Friday, Ellison’s approach and philosophy is on target.

JCP: Three Things to Mull

While JCPenney’s turnaround continues to be a multi-faceted affair, three matters at hand could push JCP stock up or down more than any other factors.

Getting a grip on these is a must for current and would-be shareholders.

  1. Product Mix: While Ullman did a great job of righting the ship when that was the only priority, one never got the impression the merchandise mix was part of the strategic discussion. Under Ellison’s leadership, it is. One of the things he has already made clear is his belief the retailer has been too reliant on apparel. He has also testing the return of home appliances in some stores. Look for more (and needed) product shakeups in the future as a means to improve overall sales.
  2. Sephora: With just a quick glance, it would be easy to conclude the Sephora beauty supply shops found inside Penney stores was more of a high-profile trophy and less of a profit-center. Now though, the set-aside shops may be a draw in and of themselves. As evidence of the premise, Ellison is proceeding with the planned opening of 60 more Sephora shops this year.
  3. Balance Sheet: While JCPenney is inching its way back to profitability, cash or lack thereof, has been and could continue to be an issue. As of the end of the first quarter, it only had $664 million in cash or near-cash assets to draw on, down from $1.9 billion a year earlier. It was able to refinance some of its debt earlier in the year, setting up a cost savings of $24 million per year. But, it’s still going to need to accelerate its move to positive cash flow sooner than later.

Bottom Line for JCP Stock

It has certainly got some lingering challenges to deal with, but for the first time in a long time there’s more reason to be optimistic than pessimistic — Ellison seems to have the company on the right track. Q2’s results will prove or disprove the idea. A good quarter on Friday could convince another swath of would-be buyers, although a shortcoming could just as easily upset the stock’s still-fragile rebound effort. Be ready for fireworks either way.

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

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