Why JC Penney is a Risk Worth Taking

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Nov 28, 2014

JC Penney’s (JCP, Financial) remarkable turnaround was brought to a halt when the company released its latest quarterly numbers. Although Penney’s margins improved, the company didn’t meet the estimates due to a huge drop in sales. JC Penney reported revenues of $2.76 billion, down nearly 0.5% as compared to the corresponding quarter of the previous year. On the earnings front, JC Penney reported a net loss of $188 million as compared to $489 million ($1.94 per share) in the year ago quarter.

The reducing sales are a long-term concern for JC Penney and this is why the company had to revise its guidance for FY 2014 downwards. However, valued at just over $7, I think JC Penney is a risk worth taking for investors. Let’s take a look at the reasons that can drive JC Penney higher in the future.

Financial Stability

The retailer remains financially delicate, yet is well on its approach to being recuperated. JC Penney may in any case be reporting losses right now; however they're drastically lower than a year ago, and the company stays focused on closure 2014 being free cash flow positive.

The retail chain reported a 7.1% change in gross margin, from 29.5% in the second from last quarter of 2013 to 36.6% in the period recently finished, and said it expected a 500- to 600 basis point growth in gross margins for the full year. Its operating cash flow likewise dropped more than 50%, going from negative $737 million to negative $320 million. What's more its EBITDA turned positive this quarter (and are required to remain so) in the wake of being negative in the same period a year ago. All things considered, JC Penney said it ought to end 2014 with a sound $2.1 billion in liquidity.

Likewise, pension costs contributed enormously to JC Penney's aggregate losses in the previous year. A year ago, all pension plan expenses cost Penney about $100 million. Notwithstanding, this situation is situated to change this year as the company expects the pension expense to be $19 million, a variation of $119 million from a year ago.

Furthermore, JC Penney's rebuilding and administration move cost, which was $215 million in FY2013, is likewise anticipated to fall in 2014. Rebuilding and administration expenses incorporate cash used as compensation because of sacking employees and also the costs included in closing down a store.

Anyway, since Penney sacked the majority of its workers a year ago, it has a more steady administration now. Actually, the company's quarterly rebuilding and administration move declined $35 million year-over-year and came in at a minor $2 million. JC Penney is a vigorously leveraged company, yet the decrease in costs will generally supplement its turnaround.

Partnership with Sephora

Cosmetics outlet Sephora is a key segment of JC Penney's strategy for restoring sales. As CEO Mike Ullman noted, Sephora "keeps on deliverring double digit development, drive activity and create noteworthy client faithfulness" that help separate it from its associates.

But, depending only on one thing is risky for JC Penney. While trying to square affiliates from making mass corrective buys by deactivating their online records, Sephora was reprimanded for randomly blocking individuals with Asian surnames who leveled charges of bigotry against the excellence supply company.

In spite of the fact that the charges aren't picking up much footing right now, maybe in light of the fact that its comprehended exchanging is an industrywide issue that harms a brand and at last damages buyers, it’s the sort of blowback that could hit JC Penney, as well, on the off chance that it’s too nearly adjusted to one outlet that drives its recuperation.

Conclusion

JC Penney has a favorable risk/reward ratio and given the company’s improving financial condition, I think it’s the correct time for investors to buy JC Penney. The stock is down over 15% in 2014 and is very cheap at the moment. Hence, I think JC Penney is a great buy.