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Is J.C. Penney Really on the Road to Recovery?

By Marivic Cabural – Mar 11, 2014 at 3:25PM

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The S&P upgraded J.C. Penney's outlook from Negative to Stable and indicated that the retailer has adequate liquidity until next year.

J.C. Penney store at Serramonte Mall, Daly City/ Photo by: Marivic Cabural

J.C. Penney (JCPN.Q) recently announced that it will no longer release its monthly sales report after its CEO Mike Ullman predicted last week that the recovery of the struggling department store chain will be completed this year.

Some observers in the retail industry opined that the decision shows a small sign that J.C. Penney is on the road to recovery. Others suggested that providing less information is negative for the company. Kristin Hays, spokesperson of J.C. Penney, emphasized that the retailer will remain transparent regarding the progress of its turnaround efforts.

Signs of recovery
J.C. Penney showed signs of recovery during the fourth quarter of 2013 when the company reported an improvement in financial results. Its quarterly loss was $0.68 per share, less than the $0.85 per share expected by Wall Street analysts.

Ullman stated that the retailer managed to overcome the most challenging part of its turnaround, and he projected that J.C. Penney's comparable store sales will grow by mid-single digits and its gross margin will increase significantly this year. He is also confident that its liquidity will remain at $2 billion by the end of 2014.

Finally reached rock bottom
Analysts at Gilford Securities suggested that J.C. Penney may have reached rock bottom, which means that the retailer will start going upwards. The firm's analyst Bernard Sosnick speculated that the retailer probably profited from the relaunch of Ambrielle, an intimate apparel brand and better jewelry collection during the shopping period for Valentine's Day.

The analyst also noted that J.C. Penney's "extreme clearance markdowns should be a thing of the past" because its merchandise assortment is becoming normal. In addition, Sosnick observed that the online sales of the retailer's home department improved. He believed that the worst is over for J.C. Penney and he maintained his Buy rating for the equities of the company.

Challenges remain
Observers in the retail industry opined that liquidity remained one of the challenges confronting J.C. Penney. Evan Mann of Gimme Credit said J.C. Penney's progress is encouraging, but he still perceives a "little room for error on liquidity side." He kept his Underperform rating for the shares of J.C. Penney, but indicated that he is willing to upgrade his rating for the stock if it continues to perform better over the next few quarters.

S&P outlook for J.C. Penney
On the other hand, the S&P believed that J.C. Penney will have adequate liquidity until next year and its cash sources will be 1.2 times higher than uses. However, the S&P noted that the capital structure of J.C. Penney is unsustainable in the long-term, but the company does not have any meaningful maturities over the next 12 months and it is not headed toward default. The agency upgraded J.C. Penney's outlook from Negative to Stable based on its opinion that the retailer will obtain "modest, sequential performance gains" due to the recent changes in its strategy including merchandise repositioning, and returning sales and promotions.

Stock action
The stock price of J.C. Penney increased 25% to $7.47 per share after the company reported improved quarterly financial results on Feb. 27. Yesterday, the company's stock jumped another 9.3% to $7.96 a share. Shares of the company continue to trade higher, and closed at $8.29 per share, up more than 4% on Wednesday. The company's stock value is still significantly lower from its highest level at $19.63 per share over the past 52-weeks.

Equity risk
Some investors remained skeptical about investing in J.C. Penney despite the upward movement of the company's stock. Others are weighing the risk associated with the company., a stock market risk management firm, shows that the current risk state of J.C. Penney's is normal. The company's stock entered the normal risk level when it started trading around $7.57 a share.

The signs of J.C. Penney's recovery lifted the hopes of  peers in the industry that are also struggling to return to profitability such as Sears Holdings (SHLDQ) and Best Buy (BBY -0.77%).

Just like J.C. Penney, Sears recorded a smaller loss of $358 million or $3.37 per share in the fourth quarter compared with its net loss of $489 million or $4.61 per share in the year-ago quarter. The improvement in its financial performance was driven by lower expenses, reduced inventory, and better sales from "Shop Your Way" members.

On the other hand, Best Buy posted a quarterly profit of $293 million or $0.83 per share compared with a loss of $409 million or $1.21 a share in the same period a year ago. One of the strategies that contributed to its return to profitability is the implementation of its "Renew Blue" cost reduction. During the quarter, Best Buy exceeded its $725 million cost reduction target to $765 million.

J.C. Penney is probably starting to recover as well as its peers in the retail industry. The management of these retailers  still have a lot of work to do to complete a turnaround, and any misstep in strategy could upset its stock price. 

Marivic Cabural has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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