J.C. Penney

J.C. Penney Comany, Inc. (JCP) Upgraded By Citigroup

J.C. Penney Company, Inc. (NYSE:JCP) 1Q13 EPS Review. The stock is only down 3% this morning to $18.20 a share on news that the company did not report even worse earnings. The stock is up about 25% since the new CEO Mike Ullman came in. Analysts at Citigroup have upgraded the stock from $15 to $20 a share based on new and higher estimates for 2015 EBITDA. Below is a summary of the report from Citi.

J.C. Penney Company, Inc. (JCP): Mike Ullman Sets the Course for JCP

Our Take — We are encouraged by the strategic plan outlined by newly-appointed CEO Mike Ullman. JCP will bring back private label in a major way (St. John’s Bay, Ambrielle, Made for Life, and JCP Home are being brought back), invest in depth of inventory to ensure in-stock availability, and utilize a “test and learn” approach for its marketing to find the best way to reconnect with core customers. In addition, fixing the J.C. Penney Company, Inc. (NYSE:JCP) Rewards loyalty program and the online business are key priorities. We expect these actions to drive SSS improvement, and we raised our 2013 SSS forecast to +0.2%, up from (-6.0)% previously, although we remain more cautious on operating margins. We reiterate our Neutral rating.

J.C. Penney Comany, Inc. (JCP) Upgraded By Citigroup
1Q13 EPS Missed Our Estimate — JCP reported 1Q13 adjusted (non-GAAP) EPS of (-$1.31), excluding the impact of restructuring and management transition charges ($72M pre-tax) and non-cash (primary) pension expense ($25M pre-tax). EPS were below our estimate of (-$0.67) and consensus of (-$0.89). J.C. Penney Company, Inc. (NYSE:JCP) previously reported 1Q13 SSS of (-16.6)%. Results reflected a gross margin decline of (-849) bps YOY (vs. our (-350) bps estimate), and SG&A expense deleverage of (-411) bps (vs. our (-50) bps estimate). Inventories declined (-9.3)% YOY, and J.C. Penney Company, Inc. (NYSE:JCP) ended the year with $821M in cash (an estimated cash burn of $960M in 1Q13).

Traffic Impressive Given SSS Decline — JCP’s (-16.6)% SSS decline in 1Q13 included a (-6)% decline in traffic, (-1)% decline in conversion, and (-10)% decline in average transaction value (due to higher clearance). We were most impressed with the sequential improvement in traffic, following a (-17)% traffic decline in 4Q12. Conversion also improved sequentially vs. a (-10)% decline in 4Q12.

Raising Target Price to $20 — We are raising our target price to $20, up from $15 previously. Our target is based on our 2015 EBITDA estimate of $1.03B (vs. $0.98B prev.) and a 6x target EV/EBITDA multiple (vs. 5x prev.). We believe that a higher multiple is justified given the opportunity to return to profitability as J.C. Penney Company, Inc. (NYSE:JCP) brings back core private label brands, increases promotional activity, and improves margins.

Merchandising: J.C. Penney Company, Inc. (NYSE:JCP) is focused on finding the right mix of private label, national brands, and attractions (i.e. shops). In the first quarter, national brands trended 20-30% better than private brands and represented a greater percentage of sales. JCP will be bringing back a number of private brands and will also offer a significantly expanded range of basics within its core brands. These are highermargin items that are expected to drive traffic and sales going forward.

Private Label: J.C. Penney Company, Inc. (NYSE:JCP) is bringing private label back in 2013 like it was in 2011, when private label represented over 50% of sales. Four key private brands are coming back, including St. John’s Bay (over $1B brand), Ambrielle (intimate apparel), Made for Life (women’s active line), and JCP Home. Private brands have been underemphasized over the past year. Lean inventories and out-ofstocks were significant headwinds for private label sales. JCP is focused on getting back into this business, which should resonate well with core customers.

Inventory: J.C. Penney Company, Inc. (NYSE:JCP) is investing in inventory to make sure that it has the right sizes and styles in-stock for customers. It has also started bringing St. John’s Bay back and expects inventory levels to be flattish YOY by the back half of the year.

Marketing: The most recent marketing better reflects the company’s efforts to reconnect with the customer and encourage them to return to J.C. Penney Company, Inc. (NYSE:JCP). Management also plans to deploy its marketing dollars more effectively to support the 20+ major shopping occasions during the year. This should result in a better return on marketing investments. The company experienced an encouraging response to its Mother’s Day marketing campaign.

Promotional Cadence: Promotional activity and marketing spend will be concentrated around the 20+ shopping occasions throughout the year. The company will combine strong sales with improved clarity of promotions.

Loyalty Program: Last year, J.C. Penney Company, Inc. (NYSE:JCP) went to a single-tier Rewards program. This year, the company will go back to a tiered Rewards program that will reward customers based on their level of spend.

Online Business: J.C. Penney Company, Inc. (NYSE:JCP) is focused on making jcp.com a stronger component of its business again. The online business lost $500M of sales in 2012, due primarily to in-stock issues, a higher penetration of home, and execution challenges. Management is aiming to create a seamless omnichannel experience with strong store and digital convergence.

Capex: Capex was $214M in 1Q13, lower than we had expected. However, accrued and unpaid capital expenditures were $335M at the end of the quarter. With the home launch beginning next month, 2013 capex is nearing completion.

Talent: JCP’s senior leadership team is intact, with especially strong teams in merchandising, planning and allocation, and stores. The company doesn’t anticipate making a large number of new hires, nor does it expect any further workforce reductions. It is focused on building bench strength.

Long-Term Profitability: Management doesn’t see a structural barrier to returning to historical sales productivity and margins. The core business remains intact. Management believes that it can return to a gross margin rate that is similar to the first three quarters of 2011 (prior to Ron Johnson becoming CEO).

Further reading Surprise Q1 Moves: Tigers Buy J.C. Penney, Loeb Sells Morgan Stanley


Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Are you an intelligent investor?

ValueWalkPremium is a website and newsletter for smart investors like yourself. We focus on the latest hedge fund industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today for only a few dollars a day and get a 3 day no obligation trial with a targeted 20% discount coupon code.

Cancel anytime during trial and you are never charged.

Limited time offer: For first 50 subscribers