Why I’m Not Buying Into J C Penney Company Inc Stock’s Turnaround Yet

JCP's earnings report raised as many questions as it answered

By Ian Bezek, InvestorPlace Contributor

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Why JCP Stock Could Plunge to New Lows

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J C Penney Company Inc (NYSE:JCP) has managed to frustrate almost everyone recently. Longtime readers know I’ve gamely tried to offer a neutral perspective on JCP stock this year. That’s in contrast to the doom and gloom that the media has reported on department stores in general and JCP in particular.

 

However, even folks like myself, who’d looked for the bright side, were forced to throw in the towel after JCP’s stunning press release in late October. At that time, the company admitted that its profits would miss its prior guidance by a mile. The JCP stock price declined 30% in the following week.

What followed was classic Wall Street. With JCP stock plummeting into the 2s, short sellers started getting cocky. JCP put out earnings on Nov. 10 and crushed greedy short sellers who hadn’t taken profits. The stock has subsequently recouped almost all its recent losses.

It was a baffling turn of events. Management prepared investors for a total fiasco of a holiday season and immediately followed it up with reasonably good Q3 results. After a month of extreme volatility, what’s next for JCP stock?

Does Management Understand Its Business?

I don’t mind a blown call now and then. It’s part of investing. However, it’s particularly irritating as a writer to get one wrong because management gave out bad guidance.

Just one day prior to the end of the quarter, JCP’s executives dropped the bomb that EPS for the quarter would come in at a 40-45 cent loss. That was far below previous expectations. Remember, they announced this ominous development just one day before the quarter ended. It should have been pretty clear how the quarter had turned out by that point.

When they reported actual earnings, the loss was only 33 cents per share. It’s hard to fathom how a business, operating in 2017 with modern inventory management systems, would offer a five-cent guidance range and then offer up a result outside the range entirely by seven cents.

Yes, I understand the concept of under promising and over delivering. However, JCP reported its guidance at the end of the quarter. In effect, it restated earnings. You can hardly call it issuing guidance when you put it out one day before the reporting period ends and then you totally contradict yourself two weeks later.

Either management had some reason for wanting the stock to tank and then recover, or it truly is so out of touch with how things are going on the ground that their honest earnings guidance was severely detached from reality. Neither seems to speak good things for JCP stock going forward.

Can They Manage Inventory Better Going Forward?

It’s important to remember why JCP whiffed on Q3 guidance and ratcheted down the 2017 overall outlook so badly. Management said at the time that they had mismanaged their inventory, specifically in women’s fashion. This was an embarrassing error for a company that has been selling this category of products for a century now.

Regardless, errors happen, and we could forgive them. But what does it say about management when they not only don’t understand their inventory, but they also apparently don’t understand how their finances look?

Amazon.com, Inc. (NASDAQ:AMZN) is an incredibly fierce competitor. I’m not a doom and gloomer on physical retailers, but you have to put up a stronger fight than this.

In the space of two weeks, JCP admitted it mismanaged its clothing inventory to a massive degree, and it followed up on that by giving investors substantial reason to doubt the quality of its bookkeeping and/or point-of-sales data-tracking system.

JCP Stock Isn’t Dead Yet, But It’s Risky

As I’ve said before when trying to make the bullish case, there are reasons to like JCPenney in 2017. The company seems to have pruned off most of its worst-performing stores. Comparable store sales have started looking healthier recently. Until the recent inventory fiasco, the company appeared poised for a decent 2017 profit.

On the credit front, the company has few meaningful debt maturities over the next three years. In theory, that should give JCPenney more time to keep executing on its turnaround plan. Additionally, in recent weeks, we’ve seen that mall operators are in some cases giving big rent concessions to keep retailers in their buildings. JCP could potentially save money on that front as well.

However, none of this matters if management can’t retain credibility with the market. The company needs to prioritize its access to capital. It isn’t at significant risk of imminent bankruptcy, but that will change within a few years if it hasn’t reestablished meaningful profitability by then.

At around $3.30, JCP stock still has explosive potential upside if same-store sales turn positive and profits come back. However, management only has a few opportunities left before the clock runs out. The inventory screwup combined with the woefully inaccurate earnings guidance have taken a lot of credibility out of JCP’s turnaround story. I’m still rooting for the company to pull off a comeback, but I won’t be putting my own money in until the company proves itself again.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/why-im-not-buying-jcpenney-turnaround-yet/.

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