J.C. Penney: Cleaning Up the Mess to Turnaround?

J.C. Penney Co., Miles City

J.C. Penney Co., Miles City (Photo credit: dave_mcmt)

J.C. Penney (NYSE: JCP) is down 45% from its 52-week high of $32.55 achieved on September 19 last year. J.C. Penney has introduced all sorts of mechanism in a bid to conjure a turnaround, which has since proved to be nothing but a mirage. The company has been consistently sweeping away hopes of investors after making promises, which have so often seemed realistic. From changing CEOs to discounting products, nothing has paid off yet. Nonetheless, J.C. Penney is not giving up yet, as it has now resumed some of the practices aborted by the former CEO, Ron Johnson.

Most recent results illustrated a worsening situation

J.C. Penney’s loss increased to $348 million, or $1.58 per share, from last year’s net loss of $163 million, or $0.75 per share, an increment of 113.5%. Total sales also declined to $2.63 billion, down from $3.15 billion reported in Q1 last year, representing a 16.4% dip. Comparable store sales were also down 16.6%. Gross margin for the quarter declined further to 30.8% compared to last year’s 37.6%. The most recent quarter’s poor showing follows a string of breathtaking statistics exhibited by the company in 2012.

During Ron Johnson’s reign, 19,000 staff lost their jobs. The company also lost $985 million spent towards the turnaround, while the December quarter saw a massive 32% decline in sales from the previous year. The company also spent more than $1 billion in the most recent quartertowards the turnaround as it continued to restore some shop-to shop stores, while welcoming new private brands.

The most recent decline in comparable stores sales is nothing new. The company has reported declines in three of the last five years for comparable store sales. It remains to be seen how this recovery campaign will work out. However, there was a huge improvement in terms of the rate of decline in online sales, which fell 10% in the most recent quarter, compared to the December quarter decline of 34.4%. The company has been bleeding cash since 2008, with sales per square meter averaging at $161, compared to $223 in 2008.

Cleaning the mess?

Reports suggest that if the the new CEO, Mike Ullman, is to turnaround the company, then he must get rid of Ron Johnson’s policy, which resulted in the company ditching promotions, discounted products, and of course, private brands and coupons. I am not being the devil’s advocate here, but I do understand that Ron Johnson joined the company with a view of turning it around.

This simply means that he is not the cause of J.C. Penney’s misery. The fact that he abolished some of the company’s old policies does not mean he is the sole cause of its downfall. When he boarded the ship, it was already sinking, and yes, maybe his strategies were not the best at the time. That said, I must admit that the situation worsened during his tenure. But more importantly, J.C. Penney must recognize that it was doing poorly even with the old strategies in place, which Ullman is bringing back.

Coming in with the idea of cleaning up Ron Johnson’s mess is not going to help turnaround J.C. Penney. Ullman must come to the realization of the company’s adverse status, considering the widening loss margin, as witnessed in the company’s most recent quarter. Additionally, the company expects to burn too much cash during the elusive turnaround, which again calls for lines of credit as well as negotiating favorable terms with vendors in pursuit of their patience.

So, what will support the turnaround?

In the company’s most recent call transcript, (Q1 2013), it did reveal that it has set up mechanisms to see itself through the turnaround, especially the availability of cash. The company has organized a cash infusion of more than $2 billion, and indeed, this should address short-term liquidity issues. Additionally, J.C. Penney has also renegotiated terms with vendors, an agreement that should see it ease off short-term cash obligations; they are accepting later payments. This will help the company utilize a majority of its lines of credit toward the turnaround.

The implementation of a leaner cost structure should also see the company cut on expenses, which should aid in cutting losses and perhaps a return to profitability in the near future. In a recent survey conducted by the company with regard to one of its private brands, St. John’s Bay, on Facebook, 70% of voters expressed that they were happy to see the brand back on J.C. Penney’s line-up. This is a good sign, which indicates that the company is actually winning some of its lost customers back from rivals like Macy’s (NYSE: M) and Kohl’s (NYSE: KSS).

Kohl’s and Macy’s not like J.C. Penney

Contrary to J.C. Penney, Macy’s is a profitable company, and certainly has no pressure from shareholders. Additionally, comparing J.C. Penney to Macy’s is like pitting David against Goliath. The more than a century-old J.C. Penney has a market cap of just $3.94 billion, thanks to the massive loss in value since 2008. Macy’s, on the other hand, would be around a couple of centuries in age if it is still around for the next 16-17 years. The Cincinnati-based retailer is the biggest among the trio with a market cap of $18.74 billion. Macy’s boasts the best gross margin at 40%, followed by Kohl’s with 36%, while J.C. Penney, as noted earlier, is just over 30%.

Both Kohl’s and Macy’s are tied at 10% in terms of operating margin, while J.C. Penney stands at a net operating loss of 13%. Interestingly, despite the 10% operating margins of Kohl’s and Macy’s, it seems that investors are still shy of the industry. Investors seem unwilling to give anything upwards of 5x P/E ratio. This is depicted by Macy’s P/E ratio, which stands at 3.39x while Kohl’s is pegged at 4.24x. Kohl’s profit margin stands at 5.09%, slightly above Macy’s at 4.91%, while J.C. Penney is at a net loss of 9.38%. Macy’s most recent quarter results were up by close to 20%, with revenue up just 4%, while Kohl’s earnings fell 4.5% after reporting 1% decline in revenue.

The bottom line

J.C. Penney is doing a good thing by resuming discounts, promotions, coupons, and allowing private brands like St. John’s Bay. This will definitely woo some of its lost customers. Consequently, vendors would be willing to wait a little bit longer for payments, as the company would appear to be certain of posting a series of sustainable sales. However, the bottom line is not about clearing the mess, but more like getting back to business.

The new lines of credit should solve short-term cash needs, while helping to cover turnaround costs. The company lags the competition and will definitely struggle to catch up with Macy’s, which appears to be romping on J.C. Penney’s failures. Kohl’s is not far off either, but looks to be a little more stable than the Plano, TX-based J.C. Penney.

J.C. Penney also received a boost from Maxim Group analysts after they upgraded the stock to a Buy rating with a price target of $27. Whether this is realistic or not, it is quite a long shot for the near term. However, looking forward, J.C. Penney’s large network of stores (more than 1,100 stores in 49 states) coupled with the return of Ullman and resumption of the various strategies is bound to pay-off at least in the long run. But how long?


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