Is It Time for J.C. Penney to Come Back Down to Earth?

After rising 9% on April 28 on great news from partner PVH, have shares of J.C. Penney overextended themselves, or is there nothing but upside from hereon out?

May 6, 2014 at 5:30PM

Images

Source: Wikimedia Commons

After shares rose 9% on April 28 on news that one of J.C. Penney's (NYSE:JCP) suppliers, PVH (NYSE:PVH), was seeing positive business developments from sales at J.C. Penney , some investors in the struggling retailer might be contemplating what moves to make next. Is now a prime time to cash in and look elsewhere for returns, or is J.C. Penney's share price appreciation a sign of better times to come ?

J.C. Penney has had a tough run
Over the past five years, J.C. Penney's situation has been anything but good. Between 2009 and 2013, the company saw its revenue fall 32.5% from $17.6 billion to $11.9 billion, while its net income of $251 million turned into a net loss of $1.4 billion. While increased competition from brick-and-mortar peers, as well as online rivals, likely played some part in the company's fall from grace, the main driver behind J.C. Penney's troubles was a poor change in leadership.

JCP Revenue (Annual) Chart

J.C. Penney revenue (annual) data by YCharts

After seeing years of mediocre performance, Mike Ullman, the CEO of J.C. Penney, stepped down and was replaced by Ron Johnson. Almost immediately, Johnson began implementing a series of reforms that he believed would propel the multi-billion dollar retailer into the future.

Perhaps the biggest change instituted by Johnson was his decision to stop providing coupons to customers and instead provide every day low pricing. Although this move was expected to retain existing customers and draw in new ones, many consumers felt forgotten ; the mass exodus of customers that followed wiped out a good portion of the company's revenue and sent its bottom line into a tailspin.

Bouncing back
With the hope of returning the company to where it was under Ullman, the company's board of directors ousted Johnson and brought the company's former CEO back into the top spot.  Despite this move, J.C. Penney's revenue fell in 2013, and its net loss widened considerably; but the company has begun reporting improvements in its comparable-store sales. This, combined with additional initiatives put into place by management, has led many investors to believe a turnaround is in progress.

In spite of reporting revenue that fell short of analyst estimates during the fourth quarter of its 2013 fiscal year, J.C. Penney saw both its cost of goods sold and selling, general, and administrative expenses decline as a percentage of sales. In part, this was due to cost-cutting initiatives implemented by the company's management team, but it was also attributed to the 2% increase in comparable- store sales for the quarter.

Picture

Source: PVH

On April 28, hopes of a turnaround rekindled once again. Manny Chirico, the chairman and CEO of PVH, announced in a presentation that results the business has seen because of J.C. Penney's sales have been encouraging and that the business is "ahead of time" . This news has left investors feeling more confident that the company could be seeing a upturn in business as opposed to the blip on the radar some investors might fear.

But we can't tell by how much...yet!
Unfortunately, neither J.C. Penney nor PVH have made public how much of their sales are related to PVH's product lines, which consist of Calvin Klein, Tommy Hilfiger, Izod, and Heritage Brands, among others. The only thing we can conclude is that J.C. Penney does not make up 10% or more of PVH's revenue because if it did, PVH would have to disclose that fact in its financial statements.

Picture

Source: J.C. Penney

Now, this doesn't mean that PVH doesn't account for some serious business for the retailer. Over the past five years, PVH's revenue has soared 241% from $2.4 billion to $8.2 billion, while its net income has jumped around between $54.4 million and $433.8 million. So, even in the event that J.C. Penney does account for the maximum non-disclosure amount of about 9.9% of revenue, the company's relationship could have comprised up to 7% of J.C. Penney's top line in 2013.

Foolish takeaway
Right now, J.C. Penney needs some good news. Based on its performance lately, it looks like the retailer could be at an inflection point where things might continue getting better. But there's a big chance that its situation could deteriorate further in the months to come. This news by PVH is a sign that the business might be turning around, but there's no guarantee.

On top of PVH's products making up a small portion of the retailer's sales, it's not out of the question to see one or more product lines thrive while the rest of a business suffers. This suggests that, while Chirico's statements could be a good thing, investors should not assume that J.C. Penney in its entirety is, definitively, seeing the same improvements.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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