J.C. Penney Stabilization Is Not a Green Light

J.C. Penney (NYSE: JCP  ) may have alienated legions of both shoppers and investors, but the company was still able to manufacture some positivity this week when management came out of its monastic state to say that same-store sales would actually show some growth at the tail end of the current quarter and throughout the final quarter of the year. Before you herald the turnaround of the beleaguered department store chain, though, there remains much uncertainty -- not to mention that year-ago sales were not a high hurdle to jump.

How low can you go?
Earlier this week, J.C. Penney shares fell to a 13-year low after Goldman Sachs recommended what amounts to a bet on the company's bankruptcy. Now, out-of-favor stocks can often present tremendous opportunity for value-hunting turnaround-lovers, but it isn't quite clear that J.C. Penney is trading at a steep discount. It trades cheap compared to its peers, but the company's business is not a sure bet.

A Citigroup analyst recently pegged the company's liquidation value at $1 per share. Investors may be tempted to look at the stock as a no-brainer, given real estate assets and a sum-of-the-parts breakup value, similar to what makes Sears Holdings an attractive play. Note that this is not the case for J.C. Penney. Sure, the company holds plenty of valuable real estate, but for equity investors, there is a long queue behind the debt holders. Reuters recently reported the company may be looking to raise an additional $750 million to $1 billion before the holiday season.

This is not to discount the accomplishment that the company has apparently achieved -- a reversal in the seemingly endless downward plunge in same-store sales. Also in the company's favor is the who's-who list of guru investors with long positions in the stock. After Bill Ackman's ill-fated role and position in the stock came to a close, investors from George Soros to Larry Robbins have piled in long, clearly under the impression that the stock has found a bottom. It may be possible that J.C. Penney is the shimmering penny at the bottom of the pool -- one that lures even the most conservative divers, only to remain glued down.

Murky water
Management's announcement shows the company has found a way to pump the brakes, but gives little color as to the viability of its recovery. J.C. Penney looks a little raise-crazy, throwing more and more cash at its business without much concrete evidence that it's really helping. It's not fully the company's fault -- this has been a particularly tough time for all retailers, as consumers just don't seem comfortable opening up their wallets in stores.

Bringing the story back to Ackman -- the investor could have just resigned his seat from the board without dumping his shares at a substantial loss. Though often lambasted in the media, Ackman is one of the best in his game, and plays with such high conviction that many consider him reckless. The fund manager knew just as well as management about any improving conditions, but still chose to dump his stake. Take that for what it's worth.

Management deserves a pat on the back for the same-store sales news -- proving many an analyst wrong. But don't buy the news on the idea that its stock just can't go any lower -- it can, and we don't yet know how management will prevent it over the long term.

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  • Report this Comment On September 27, 2013, at 5:33 PM, AlexCho wrote:

    I found the article to be fairly thoughtful, and well-written. However, while you handpick financial metrics, you ignored the possibility of some upside going into the holiday season. The real test of consumer demand, is during the fourth quarter. There's been a significant decline in demand for discretionary purchases, but on the other hand property values and vehicular demand both trended higher. Could it just be that the demand for credit has somewhat stabilized for bigger ticket purchases, and that on the aggregate demand for consumer discretionary purchases declined only temporarily. After all, factoring in the purchase of a new car, could have enough of a percentile difference on an average household budget to have a temporarily negative impact on consumer good purchases. But yet on the upside, discretionary income has trended higher over the past five years. Giving us reasonable suspicion that discretionary spending may eventually resume its up-trend give enough years. :) best of luck, young grasshopper.

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