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J. C. Penney: Embrace the Fear with the Right Investment Thesis
Posted by: Muhammad Bazil (IP Logged)
Date: May 3, 2014 09:06AM
Companies like J.C. Penney (JCP) on their way to recovery through turnaround initiatives often pose two challenges to investors. It’s either the turnaround leads to a costly adventure and loss of investors’ hard earned money or it brings enormous profit to investors who had the courage to make the right bets. J.C. Penney is a retail company on the verge of booking increases on its top line if consumer spending continues to improve into holiday and back-to-school seasons ahead. With the turnaround stepsbeing taking so far by JCP, the retail company now falls into the same category with Best Buy (BBY) and Rite Aid (RAD) but while Best Buy and Rite Aid retails technology products and drugs respectively, JCP retails family apparel, footwear accessories, home furnishings, and a range of beauty products through its departmental stores across the U.S.
Invest Now in JC Penney with a Thesis
As investors, we all want the value of our portfolios to rise and keep rising. However, seasoned investors know that a strong plan of action is required to succeed in the stock market. Investing in stocks with a goal in mind and creating an exit strategy that is in line with your temperament all constitute sound investment thesis. Irrespective of the potential prospects or risks inherent in any stock investment, good things usually come to investors who invest with a goal in mind; nothing takes them by surprise. Though investing in JCP stock at this time requires due diligence and sound investment thesis but it is well worth the efforts as the stock is at its low prices which offer a lot of attraction to value investors like me.
New Strategies Will Drive Growth at J.C. Penney Soon
The turnarounds that have been taking place at JC Penney lately were targeted to right the wrongs caused by the immediate past CEO, Ron Johnson. Ron Johnson’s over-ambitious retail business strategies caused a whopping twenty five percent drop in the sales of JC Penney at the financial year ended February 2, 2013 with a loss of about $4.3 billion in revenue. In an industry where competitors fight for every percentage increase in sales, Johnson’s initiatives could be regarded as disastrous. Several loyal customers that were alienated from shopping at JC Penney are now being gained back when the company reverted to some of its old retail practices that endeared the JCP brand to many customers. Many customers expects to find key private and national brands like St. John’s Bay and Ambrielle at JCP departmental stores and these have been brought back.
Already, the turnaround initiatives at the JCP have started to show positive results. The company recently reported a profit of $35 million for the financial period ended Feb 1, 2014 which translates to 11 cents per share as against a loss of $552 million or $2.51 per share it reported for the corresponding period a year ago. Also, sales from JCP’s e-commerce front have started to gain traction. For example, the company reported an increase of 26.3% for its online sales for the financial period ended Feb 1, 2014 while online sales for January 2014 alone increased by 45%.
The Turnaround Story of Best Buy and Rite Aid Cersus J.C. Penney
The fourth-quarter results of Rite Aid for the year ended March 1, 2014 released on Thursday, April 10, 2014 is a good example of the positives that could come out of a company’s turnaround plan. The 2013 4th-quarter revenues of Rite Aid inched up by 2.2% from $6.5 billion in the prior quarter of last year to $6.6 billion in the current quarter under review. The company is being turnaround from operating a chain of drugstore into a wellness provider.
Best Buy is another story of a turnaround plan that is aiming for success but it is not yet certain how far the company can go. The world’s largest electronics chain is focusing on online sales channel from its traditional brick and mortal stores and also aims for growth through other sales plans such as ship-from-store to gain market share from the competition. At the moment, declining sales is weighing heavily on the company and its shares prices have turned south by about 35% year to date but its cost-cutting strategies is ongoing and aimed at cutting its sales and operating costs by $1 billion on a yearly basis going forward.
Looking at the three stocks undergoing different stages of turnaround currently, Rite Aid is at the forefront of complete turnaround with solid results being delivered. Rite Aid has turned the corner and has gone beyond the stage of a turnaround to growth. In fact, the company is poised for further growth in sales and revenues in the coming quarters. With declining sales at the moment despite improvements posted in 2013, Best Buy seems to still be in the wood in all major indices including gross profit margin meaning the stock poses considerable risk at the moment. J.C. Penney is on the right track to stability and growth and the trend should be maintained if consumer spending continues to improve.
Valuation Metrics and Conclusion
J.C. Penney’s retail strategy has been revived and it’s back on its feet by popular demand orchestrated by several loyal customers. Its fourth-quarter results showed modest improvements as it exceeded analysts’ expectations. Analysts’ at S&P expects the modest gains in JCP’s recent financials to continue over the next fiscal year. At current prices, the stock of J.C. Penney is at attractive valuation levels meaning that the stock is a good buy based on its cheap valuation.
Stocks Discussed: JCP, RAD, BBY,