What It'll Take for J.C. Penney to Recover in 2014

J.C. Penney (NYSE: JCP  ) performed abominably in 2013, with the stock losing more than half its value as the worst performer in the S&P 500. But even as some conclude that the department store retailer is down for the count, others wonder whether Penney could follow the same turnaround path that vaulted Best Buy (NYSE: BBY  ) to huge gains last year and whether fighting back against rivals Macy's (NYSE: M  ) and Sears (NASDAQ: SHLD  ) could help Penney restore at least some of its former glory.

2013 was a transitional year at J.C. Penney, as a poor 2012 holiday season sent former CEO Ron Johnson packing in favor of predecessor Mike Ullman and his return to lead the ailing retailer. As the year progressed, Penney showed some signs of hitting bottom, but investors continue to lack confidence in its turnaround attempts and clearly want to see hard evidence of a rebound before they commit any more capital to the cause. Let's take a closer look at J.C. Penney's prospects for 2014.

Stats on J.C. Penney

Average stock target price

$9.74

Full-year fiscal 2014 EPS estimate

($5.95)

Full-year fiscal 2015 EPS estimate

($2.72)

Full-year fiscal 2014 sales growth estimate

(7.3%)

Full-year fiscal 2015 sales growth estimate

6.7%

Forward P/E

NM

Source: Yahoo! Finance. NM = not meaningful due to negative earnings estimates.

Can J.C. Penney really bounce back in 2014?
As you can see above, analysts still have some belief in J.C. Penney's upside, with current price targets more than 25% higher than where shares trade now. That represents a much larger potential gain than investors see for Macy's or Sears, and even Best Buy's more ambitious analyst price targets are less than 25% higher than shares right now.

The best way that Penney could start things off well would be to have a blowout holiday quarter. Unfortunately, the retailer has been somewhat tight-lipped about how the holidays went, releasing only its subjective assessment that it was "pleased with its performance" during the period. It's interesting to recall that this time last year, Best Buy's own holiday quarter was somewhat tepid, with a big plunge in international sales and flat performance domestically. Yet shareholders focused on huge gains in online sales, applauding Best Buy's ability to compete with its Internet rivals and sending the stock price much higher in response.

Absent impressive holiday results, Penney will instead have to grind out better results throughout the year. That should be easier because of weak comparisons from last year's poor performance, but Penney's weak financial condition leaves it vulnerable to potential shocks. For instance, its litigation with Macy's over its ill-fated agreement to offer a Martha Stewart line of home goods is still outstanding, and even though Penney has dramatically pulled back on its relationship with Martha Stewart, any adverse court ruling could cause further damage to Penney's fragile finances.

Perhaps the most difficult obstacle Penney faces is that it doesn't have a core strength to fall back on. Best Buy's recovery came from identifying opportunities in high-margin areas like mobile and making the most of them. By contrast, Macy's, Sears, and other retailers have all worked hard to steal Penney's customers away when Penney's strategic shift had it moving away from traditional discounting. Even with Penney now saying it's ready to return to its former discounting ways, its rivals -- especially Macy's -- aren't going to let those customers return without a fight.

For Penney to recover, it has to go all-in on a strategic direction and then pull out all the stops to try to achieve it. An essential part of its strategy also has to be finding a way to become profitable, because with current projections seeing red ink well into the future, Penney is running out of time to convince increasingly skeptical investors that throwing good money after bad will eventually help the retailer emerge from its time of trial.

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