It's getting frustratingly difficult to make the bull case for J.C. Penney (NYSE: JCP ) . Readers who have followed my coverage of the company are well aware of my steadfast support of the beleaguered retailer, even in the face of double-digit declines in revenue, profit, and same-stores sales. In 12 months, half the market value of the company has vanished, along with much of its loyal customer base. Top analysts have said that Ron Johnson, despite his intelligence and talent, simply cannot plug the hole in this Bismarck of a company. All of that said, I am not ready to admit any wrong. Here are three reasons that J.C. Penney is a buy after yesterday's earnings.
Excluding reorganizational charges as part of the ongoing transformation, J.C. Penney lost $427 million, or $1.95 per share, in the fourth quarter. Sales were down 28% over the year-ago period, with same-store sales down a jaw-dropping 25%. Online sales plummeted even lower -- 33% below the prior year's number. CEO Ron Johnson admitted that these numbers were even below the company's own expectations and that he takes full responsibility.
Today, tomorrow, and likely for the rest of the week, the paragraph above is all you will hear about J.C. Penney as reasoning for why the company is done, over, kaput. Within two hours of the earnings release, The New York Times had already published an article titled "JC Penney's Poor Showing Is Another Retail Miss for Ackman." People love to watch a burning semi on the side of the interstate.
I am not defending the company's earnings -- they were thoroughly, unabashedly awful. Nothing on the company's income statement is reason to celebrate. That is because the income statement will be the last piece of paper to show progress at the company. As I have said too many times before, this is a very long-term process that was never intended to take six months, a year, or even three. J.C. Penney is in the midst of a process normally reserved for privately held companies. It is completely reorganizing on every level of its structure. Now, that all could easily be disregarded as conference call fodder and basically hearsay. But there is evidence, and deep-research-driven investors will recognize it.
As of right now, J.C. Penney is trading at a market value of just over $4 billion. In the third quarter, the company had $525 million in cash and short-term securities. As of the most recent quarter, that number is now $930 million -- close to 25% of the market cap. Of course, positive sales figures are typically associated with more cash and vice versa, but this is a very important figure for the company despite its dismal sales performance. J.C. Penney is spending all sorts of money converting 111 million square feet of retail space into an entirely different concept while lowering its debt load, chasing down new partnerships, and ridding itself of cash-sucking legacy systems. In the last quarter alone, the company paid down $250 million in debt.
The company appears to be managing its inventory levels at an expert level, bringing it down by $575 million from the previous quarter and starting 2013 with a fresh slate of products. This was one of the first goals stated by Johnson at the beginning of the transformation.
The company also generated $405 million in cash flow this quarter. With its credit facility included, the company has access to $3 billion. This should all put to rest allegations that the company will face a liquidity crisis in coming quarters.
I mentioned in a previous article that sales per square foot for J.C. Penney's old stores were $134. For the renovated stores, which still only feature a small sampling of what is to come, that number is $269 per square foot. That is a tremendous figure to support the success of these few but telling new store concepts. This spring, the company will transform 11 million square feet into the new format -- 10% of the outstanding square footage. This coming quarter, the company will open 700 Joe Fresh shops and 20 new home decor shops across 505 stores. For the year, it will open 60 new Sephora shops. Sephora has been the strongest-performing shop to date, but early numbers from Joe Fresh online show it as a big growth driver in apparel.
With 60 million shares (nearly 30% of the outstanding) short, and likely more as the week goes on, what will happen when the ratio of unrenovated to renovated space begins to even out and eventually sways in favor of the latter?
3. Everybody hates it
I cringe at the outcry I'm sure is to come in the comment section, but Warren Buffett always says, "Be greedy when others are fearful." Is that the basis of a investment thesis? No, it's just a little silver lining. The savvy and patient investor will forever take comfort when his ideas are shot down by 90% of the investing community -- it means he's on to something. The media is on JCP's case like a hawk and has flooded the newsfeeds with dreadful headlines that make it sound like a rogue asteroid flew over Russia and into J.C. Penney's headquarters. The aforementioned short interest proves that everyone can foresee the decline of J.C. Penney.
If for no other reason than to spite the investing public, J.C. Penney will turn around.
My call stands as it has for the past year. J.C. Penney is a deep-value investment for those who have the patience for a five-year investment horizon if not more. The stock will likely swing and continue to depress long investors in the next quarter. On the conference call, Johnson said he believes the company will likely return to growth once the home and Joe Fresh shops are in place, which should happen by the midyear mark. The third and fourth quarters of 2013 will be the first real test of the turnaround effort on the income statement.
All in all, I find that, under $20 per share, J.C. Penney is a long-term buy.
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