JC Penney (JCP, Financial) set itself out on a long road to turnaround and seems to be executing well. However, this isn’t complete yet and it will still take a long time to come out of the red. Despite the continued momentum, losses aren’t going to turn into profit any time soon. One of the hallmarks of successful turnaround attempts is ability to control costs, and the department store chain seems to be doing well.
The company released first-quarter fiscal 2015 report and posted an earnings beat while missing on top-line. Let’s recap the numbers and see whether the stock is a buy or a sell.
First quarter recap
- During the quarter, comps grew by 3.4% versus 7.4% during the comparable period in the prior year and came in below company’s own guided range of 3.5–4.5%. This was attributed to traffic slowdown and April and split of the busy fortnight running up to Mother’s Day into first and second quarters.
As a result, revenues grew 2% year-over-year to clock $2,857 million. Analysts were expecting $10 million more. Regionally, sales move up in all regions, with Home, Women’s and Men’s Apparel being the best performing categories. - The department-store chain’s general and administrative, or SG&A, expenses declined 4.4% year-over-year and expanded 220 basis points, or bps, as a percentage of sales.
- As a result of improved margins on clearance sales, gross margin expanded 330 bps and gross profit came in at $1,041 million, representing 12.4% year-over-year gains.
- The company reported a loss of $0.57 per share versus a loss of $1.16 per share in the year-ago quarter. Analysts were expected the loss to be $0.20 per share more.
Huge debt load
The debt load on balance sheet stands at about $5.2 billion and the company holds around $1 billion cash. So, JC Penney is trying to navigate through troubled waters with a net debt load of $4.2 billion. This is huge as interest payments of around $415 million will be a drag on the bottom line.
Growth ahead
As per internal research, only 26% of women are purchasing footwear at JC Penney and this provides significant growth opportunity. On a pilot run basis last year, the company reset the shoe department at limited stores and found the results to be encouraging. As a result, the company is moving ahead with resetting the shoe department across all its stores and hopes to complete by back to school season.
Home remains one of the biggest growth opportunities and the company is working to unleash the full potential. It is making efforts to getting back in stock on inventory, make changes to the in-store presentation with InStyle Stackhouse and key value items. In addition, the company is working with Eva Longoria on an exclusive to JC Penney line of bedding in home that will be available in approximately 150 stores on jcp.com.
There’s a lack of cross-selling and this can be a good growth opportunity, going forward. In center core, the department-store chain is testing improvements in the presentation of handbags, fashion accessories, sunglasses and fashion jewelry and the results have been better than expected. So, cross shopping will result in higher sales and also boost the bottom-line.
Analysts are optimistic
As a result of a decent fist-quarter report, JC Penney is getting support from bulls of the market. For example:
- Telsey Advisor Group stuck to its Outperform rating with a price target of $10.
- On the basis of positive outlook that the department-store chain has several options to clock $1.2B in EBITDA by 2017, Piper Jaffray lifted its price target to $15.
Final words
The department-store chain is cruising ahead with its plans for turnaround. Buoyed by the performance in the reported quarter, JC Penney is confident about achieving EBITDA goal of $1.2 billion in 2017. Tweaking store layout, adding exclusive range of products and improving customer experience in online shopping initiatives will drive growth, going forward.
However, it is still a long way off from coming out of the red and huge debt on balance sheet remains the biggest drag on bottom line. But, if you are a long-term investor, it is worth buying for long term.
