Warren Buffett has been noted as saying that most turnarounds don't ever really turn around, but Peter Lynch considered them to be one of the six categories into which he would group his successful stock picks. Apart from the differing investment styles of the two masters, a turnaround's fate comes down to this: Many times they don't, but sometimes they do.
Retailer J.C. Penney (NYSE:JCP) seems to be falling into the latter camp. Buoyed by 3% increases in same-store sales and Internet sales growth of 33%, the venerable merchandiser turned in a fourth-quarter profit from a year-ago loss. Penney's reported earnings per share of $1.16 beat analyst expectations by a nickel when its discontinued operations were excluded, namely the Eckerd drugstores that it sold to CVS (NYSE:CVS) in August. In the final year of a five-year turnaround plan, J.C. Penney would appear to be a Lynchian company that "deworseified" itself into sorry shape, but now has the focus to be a winner.
Part of that focus comes from improving its clothing line. It has inked a new deal with designer Nicole Miller and will be bringing in a men's line in March from Nick Graham, founder of Joe Boxer. That brand has been a strong part of Kmart's (NASDAQ:KMRT) own resurgence from bankruptcy. It also puts Penney's on par with competitors Target (NYSE:TGT) and Kohl's (NYSE:KSS), which have also signed up exclusive designer deals. The company will unveil a new television advertising program during the upcoming Academy Awards.
Compared to last year, sales for the quarter were actually off -- $6.07 billion versus $6.10 billion -- but last year included an extra reporting week that boosted numbers. Net income rose to $328 million compared to last year's $253 million loss on the strength of improving gross margins and lower administrative expenses. Turnaround specialist Allan Questrom, who stepped down as chairman and CEO in December, was given much of the credit for the company's reversal of fortune.
Improvement in fourth-quarter results, though, goes to holiday gift cards. At the beginning of the holiday season, many analysts were in a panic as it appeared shoppers were not spending money at any retailers. Wal-Mart (NYSE:WMT) was particularly battered for reporting lackluster same-store sales. But the arrival of the gift card helped extend the holiday season as consumers waited for the inevitable post-holiday sales and clearance specials to ring the registers. What looked like a retailer retreat in early December turned to a rout in January. According to the International Council of Shopping Centers, the holiday shopping window has been lengthened thanks to gift cards, with specialty apparel retailers seeing comps grow 3.3% and department stores like Penney's reporting 1.7% growth.
Guidance for 2005 appears pretty much in line with analyst expectations, though first-quarter results look like they may be strong. Penney's is predicting mid-single-digit same-store sales for February and low single digits for the quarter.
The company has turned around so well that it is now on the lookout for expansion possibilities. With $2.5 billion in cash available, it plans on being aggressive in buying properties if the price is right. It ended the quarter with $4.7 billion in the bank, but subtracted out $1.6 billion for a now-completed share buyback and has earmarked another $600 million for future buybacks.
At a forward multiple of just 14 times the high end of guidance, J.C. Penney's stock might just be the thing to turn around an investor's portfolio.
You can read more about the successful turnaround at the 100-year-old retailer:
Fool contributor RichDuprey can turn around 180 degrees for a Coors Light. He owns shares in Wal-Mart, but does not own any of the other stocks mentioned in the article.
