The bear case against J.C. Penney (NYSE:JCP) is largely predicated on the troubled retailer not being able to repeat the performance it had last year. The smart money said all the easy sales had already been made and now that it was lapping those results, J.C. Penney would run into strong headwinds.
As I've pointed out all along though, ever since the troubled department store operator began its turnaround efforts, it has managed to confound the pros and is able to "surprise" them virtually every quarter. It looks like J.C. Penney just did it again, too.
After a senior executive "inadvertently" revealed the company's same store sales progress for the first quarter to an analyst, J.C. Penney had to release the information publicly to not run afoul of SEC regulations. And those numbers show that Wall Street was once again low-balling J.C. Penney's effort.
Showing surprising strength
According to the retailer, comparable sales so far in the quarter have been running 6% higher over last year. Taking into account the shift of the Easter holiday into J.C. Penney's March fiscal month this year, it expects comps to rise 3.5%-4.5% by the time the quarter ends at the end of April.
Considering J.C. Penney's comps grew 6.2% in Q1 last year, analysts were anticipating it would only notch a 3.1% gain for the quarter. J.C. Penney is obviously doing better than what Wall Street expected yet again. Management itself didn't provide official guidance for this quarter, but the leaked results are certainly in line with its forecast for the year of 3%-5% comps growth.
The market wasn't as happy with these numbers as you'd expect. Apparently wanting comps to come in even higher, investors sent the retailer's shares down by more than 7% between Monday and the end of the trading on Thursday, to $8.69.
What have you done for me lately
And that's about three times higher than where one analyst team thinks they should be. Imperial Research reiterated its target price of just $3 per share this week. The analysts argue that J.C. Penney's price is inflated based on a comparison of its earnings before interest, taxes, depreciation, and amortization to both Macy's and Dillard's. They believe J.C. Penney should instead trade at a discount because it has more debt, is expected to generate lower margins, and owns less real estate than its peers.
Similarly, Wells Fargo and UBS analysts also think J.C. Penney's better-than-expected performance is much ado about nothing and that its valuation has gotten ahead of the fundamentals.
Not that the analysis is completely devoid of value. Shares of J.C. Penney are up about 33% year to date (obviously higher before this week's pullback) and nearly 50% above the 52-week low they hit back in December after the retailer surprised Wall Street with a revenue miss (even though Penney's had previously warned its sales were slowing).
Furthermore, as the analysts note, the retailer does trade at a much higher EBITDA multiple than either of its rivals. Yet J.C. Penney remains a company in turnaround mode that was nearly done in several years ago as a result of former CEO Ron Johnson's ambitious plans to reimagine what the retailer could be.
A long road back
While its sales cratered in the aftermath of that makeover and J.C. Penney has a long way to go to reach parity with just three years ago -- let alone when it was at its peak in 2006 -- we shouldn't be judging it on those results. Full-year revenue last year was more than $12.3 billion. While that was almost 30% below J.C. Penney's 2011 revenue of $17.3 billion, it was still 3% above its annual revenue in 2013, when everyone expected J.C. Penney to go bankrupt.
It has since engineered an amazing recovery. During the Christmas season, J.C. Penney logged better comp sales growth than competitors like Macy's, which struggled to attract sales. This suggests that J.C. Penney was gaining market share.
Perhaps J.C. Penney's valuation is a little higher than what might be prudent. But as the retailer has had a way of showing up Wall Street's best thinking, it may prove their low-ball best case scenarios are just the starting point for the department store chain to go higher.