Is J.C. Penney a Slam Dunk Heading Into Earnings?

As J.C. Penney is revving up to report earnings, some investors are probably wondering what to do about the business. Is now an excellent time to make an investment in the struggling retailer, or should investors consider stakes in Macy's or Kohl's instead?

May 10, 2014 at 7:52AM

G

Source: Wikimedia Commons

Heading into earnings, investors holding shares of J.C. Penney (NYSE:JCP) are probably feeling pretty nervous. Over the past few years, the retailer has been struggling with declining sales and consecutive annual losses, each year worse than the last.

Now, with the company teetering between recovery and financial distress, it's very possible that this upcoming earnings release will give investors some insight into what the future holds for the business. Will this quarter signal a definitive turnaround, or should investors consider looking to Macy's (NYSE:M) or Kohl's (NYSE:KSS) for a brighter future?

Mr. Market seems cautiously optimistic on the retailer
For the quarter, analysts expect J.C. Penney's management team to report revenue of $2.71 billion. If these forecasts are correct, this will signal a modest 3% gain compared to the $2.64 billion the company reported in the same quarter a year earlier and would most likely be due to a rise in comparable-store sales as customers return to the once high-flying retailer.

From a profitability perspective, Mr. Market also hopes to see some improvements compared to what the company reported last year. If the turnaround is going as well as what analysts perceive, J.C. Penney will report a loss of $1.25 per share for the quarter. Admittedly, this is far from ideal, as investors would much rather see a net gain. But even a loss of this magnitude, which would equate to an aggregate loss of $381 million, would be better than the $1.58 per share loss seen during the same quarter last year.

A nice earnings release could be a sign of a definitive turnaround
The past five years have not been particularly kind to investors owning a piece of J.C. Penney. Between 2009 and 2013, the company's revenue fell a jaw-dropping 32% from $17.6 billion to $11.9 billion. After a management shakeup, Ron Johnson, the CEO a that time, instituted a series of plans to turn the company from a stagnating business to a thriving enterprise.

Unfortunately, these plans, which included cutting off the company's coupon program and switching up its store format, resulted in a significant customer exodus. This, in turn, caused the company's fall in revenue and turned its net gain of $251 million in 2009 into a net loss of $1.4 billion by the end of its 2013 fiscal year.

Picture

Source: J.C. Penney

It was during this time that the board of directors threw Johnson out of the company and reinstated Mike Ullman as the top executive. Under Ullman's leadership, J.C. Penney continued posting losses but began, last October, seeing comparable-store sales rise. Due to Ullman's decision to begin providing coupons and his more interesting choice to continue growing the company's store-within-a-store concept championed by Johnson, the business earned $0.11 in the fourth quarter of its 2013 fiscal year, far better than the $0.82 loss analysts expected.

Are there better long-term picks than J.C. Penney?
If management can turn the company around and begin posting annual net gains and improving revenue metrics, J.C. Penney could end up being an attractive play for the Foolish investor. However, as a turnaround, the business does provide a lot of downside risk, especially when placed next to rivals like Macy's and Kohl's.

Over the past five years, Kohl's has done alright for itself. Between 2009 and 2013, the company saw its sales rise 11% from $17.2 billion to $19 billion. This sales increase was partially due to a 4% aggregate rise in comparable-store sales but was mostly due to a 9% increase in store count from 1,058 in 2009 to 1,158 by year-end 2013.

JCP Revenue (Annual) Chart

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

Even though this is significantly better than J.C. Penney's performance, the company's profitability did suffer as a result. During this five-year period, Kohl's reported a 9% decline in net income from $973 million to $889 million, as higher costs stifled its ability to create value.

Over the past five years, the best performer has been, without a doubt, Macy's. During this time frame, the retailer saw sales climb 19% from $23.5 billion to $27.9 billion. Despite being negatively affected by a 1% drop in store count, Macy's benefited greatly from a 23% rise in comparable-store sales.

In addition to higher sales, Macy's reported a phenomenal growth rate in net income over this period. Between 2009 and 2013, the business saw net income soar 352% from $329 million to $1.5 billion. This was due, in part, to the company's rising sales. But it can also be chalked up to lower costs, primarily in the business' interest expense, which fell from 2.4% of sales to 1.4%, and its selling, general, and administrative expenses, which dropped from 34.3% of sales to 30.2%.

Foolish takeaway
Going into earnings, Mr. Market has higher hopes for J.C. Penney, but its expectations are also cautious given the company's recent performance. If management can meet or surpass sales and earnings estimates, it could be a sign that the company is well on its way back up to the former glory it once had. But any shortfall could harm the already fragile trust of the retailer's shareholders.

For investors who don't believe in the company's ability to achieve a full-fledged turnaround, both Kohl's and Macy's might make for more appealing opportunities. Both have sported revenue growth over the past few years, and Macy's in particular has seen some tremendous bottom-line expansion. This could make either enterprise a more stable and successful long-term prospect than J.C. Penney but would have the downside of smaller returns if their struggling peer does end up making a comeback.

You probably won't see a coupon for this!
Wearable technology is set to take the world by storm. If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see (wear!) this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers