In many ways, the embarrassing implosion of J.C. Penney Company Inc. (NYSE:JCP) and JCP stock was a herald for what was to come in retail. Hedge fund manager Bill Ackman effectively took over the company, as he saw a possible reinvention for a tired retail name. As we all know, he hired Ron Johnson, who is often linked with the success of the Apple, Inc. (NASDAQ:AAPL) store idea.
In many ways, there was merit to the ideas behind reinvention. The tired JCP stores were totally reinvigorated. They looked modern, had the store-within-a-store concept cooking, but consumers had come to take massive discounting via coupons as being part of the shopping experience at JCP. That is the same model used at the now-struggling Macy’s Inc. (NYSE:M). I admit that going into a Macy’s store, regularly seeing that merchandise was already being discounted 10-30%, and being able to pile on additional coupons sometimes makes going to the store worthwhile.
Consumers refused to accept the no-discounting model at JCP. That destroyed sales, even before Amazon.com, Inc. (NASDAQ:AMZN) really ate into retailing.
JCP stock is now at $3.68. This is well off its 2006 high of $81.
However, I think the near-and-medium-term worst case scenarios are priced in. Sure, JCP stock can go lower, but I think we have a potential asymmetrical opportunity here for traders.
One of the recent revelations from current management is the use of data mining on its consumers. This is a pretty broad phrase – “data mining” – but the gist is to take what is known about the JCP consumer and use it as efficiently as possible. If used properly, it can make things like managing inventory relentlessly efficient. Rather than estimates, data mining may be able to trim or significantly reduce excess inventory manufacturing.
Things have been improving slowly at JCP. The company did see small revenue increases, totaling about about 2.5% over the past two years. More efficient spending, as well as cuts, pushed an operating loss of a quarter billion dollars to income of almost $400 million. Most of all, the $700 million net loss has been wiped out, bringing JCP stock net income to break-even.
A troubled company always has to keep an eye on cash flow. The JCP stock price has room to improve here, but if it can squeeze out another $100 million, it will be free cash flow break-even. Fortunately, management seems to think it will hit $300-400 million in free cash flow for FY17. If true, that would be a huge positive move.
The other concern is long-term debt. While that does stand at $3.9 billion, maturities are negligible in the near term.
Same-store sales may be on the mend. While the first half of the year saw negative comps to the tune of 2.4%, it appears that August and September may result in flat-to-1% comps.
The Bottom Line on JCP Stock
With JCP stock price hovering right around book value, downside seems limited here. I don’t see JCP roaring back to life suddenly, but there could be some catalysts that push it forward. Certainly if comps start to improve, we could see a solid move in the stock.
If that cash flow continues to improve, and data mining starts showing tangible results, that would be the major catalyst for JCPenney stock. Because bankruptcy seems unlikely – especially since positive free cash flow of $300 – 400 million would take care of near-term debt maturities, I think the path of least resistance is higher. I’m just not sure how high.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
