J.C. Penney Company, Inc. (JCP): The Window Is Closing Quickly

Sterne Agee analysts Chuck Grom, Renato Basanta and John Parke rate J.C. Penney Company, Inc. (NYSE:JCP) as Neutral and lower their estimates and price target as a 2% increase in 4Q SSS isn’t good enough, but was a step in the right direction.

J.C. Penney Company, Inc. (JCP): The Window Is Closing Quickly

While posting a +2.0% comp in 4Q is a step in the right direction, the slope of the improvement continues to disappoint. Equally concerning, our math suggests comps were negative (say 1%) during the December period, which frankly is just unacceptable given the compare. Net, odds of another cash infusion just augmented meaningfully.

J.C. Penney: The facts and what was not said

In the press release out this morning, J.C. Penney Company, Inc. (NYSE:JCP) provided a preliminary update on its sales for the holiday and fiscal fourth quarter, which included a 2.0% SSS for 4Q. For the combined, nine-week November and December period, the company reported comparable sales of +3.1%. Additionally, management highlighted 26.3% e-commerce growth for the quarter. On a category level, J.C. Penney reported solid performance in beauty, activewear, sweaters, outerwear, desses, boots, men’s clothing, luggage and housewares. Of note, J.C. Penney closed fiscal 2013 with total available liquidity in excess of $2B. Importantly, unlike prior sales updates, management failed to provide any color on traffic, conversion, or AUR.

The math signals a negative comp in December

With the quarter up 2.0% and November-December up 3.1%, historical monthly sales patterns suggest to us that December was likely down ~1.0% and January was down ~3.5%. On the 2-year stack, we believe trends improved slightly in January vs. December, but still less than desired, as the slope of the improvement needed to be much better to effect the kind of turnaround that J.C. Penney Company, Inc. (NYSE:JCP) needs, in our view. At up 2.0%, 4Q as a whole saw a very slight improvement on the two year stack at down 29.7% vs. 3Q’s down 30.9%. Still, as we have discussed in recent notes J.C. Penney needs the improvement to be much better than currently tracking and it is becoming increasingly critical that the company starts to see meaningful improvement if it is to survive as currently constituted.

What it tells us about 2014 and beyond

While the print was not far from expectations (Street @ +4.3%, Sterne @ 6.4%), we believe it raises two important questions regarding the financial outlook and viability for J.C. Penney. First, does J.C. Penney Company, Inc. (NYSE:JCP) have enough “ammunition” to improve its brand equity and drive traffic? With a few new brands on the horizon and continued adjustments to current planograms set for 1Q – there is some hope . . . but we believe the window is closing rather quickly. Second, will J.C. Penney need to raise additional funds and when? Based on our model (FY14 = assuming a +2.0% comp/GPM + 540 bps YOY/SG&A $ growth down 1.7%), we believe JCP could run into another liquidity situation by 3Q14. The bottom line is that J.C. Penney’s sales trend need to improve materially better . . . and quickly.


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