JC Penney - Is There Light at the End of the Tunnel?
First Good News in a Long Time
Not only did same-store-sales increase by 10.1% in November after improving by 0.9% in October, the E-commerce department also remained very strong. As a matter of fact, E-commerce sales were up 36.6% year-over-year. October and, above all, November figures are key to understand how the new strategy is working out for the company. According to management, solid early reads on brands such as Modern Bride and St. John's Bay have been specially reassuring and they constitute a strong sign on how customers are reacting to the newly implemented strategy. Most analysts are now expecting J.C. Penney's January same-store-sales to increase by 8% (versus the 4% previously expected) and they expect the company to end 2014 with a total liquidity position of about $1.6 billion as a result of a much lower cash-burn given by stronger sales.
All the above being said, according to Credit Suisse's analysts, this early positive signs should not be taken too seriously. They argue that November 2012 was an unusual month for both the industry and JC Penney. According to the bank's analysts “in the early part of the month, business was disrupted by Hurricane Sandy in much of the Northeast, making the early part of the month a poor sales period. For JC Penney, as last year was the nadir of the attempt to reposition the merchandise offering, it had no Thanksgiving opening and limited door busters that began at 6 a.m. We think what in effect was an extra day this November could account for 30% of the reported same-store-sales improvement.” I agree with Credit Suisse on the fact that its wise to be cautious, but a 10.1% same-store-sales improvement is tough to ignore.
Next year will be the key year for J.C. Penney. Since the company's 2013 EBITDA should be negative by about $775 million, we can not compare the company's valuation versus its closest peers such as Dilliard's (DDS) and Kohol's (KSS). Instead, we can use a EV/Sales multiple. According to such multiple, J.C. Penney trades at a 33% and 50% discount to its peers, respectively. I believe this huge gap could be closed if JC Penney achieves an EBITDA break even for its 2014 financial year. Of course there still are enormous risks tied buying J.C. Penney shares but the potential rewards also look huge. Great Investors such as George Soros, Michael Price and Mario Gabelli seem to think that, at this point, the potential rewards outshine the actual risks.