Via Robert Drbul, Jessica Schoen and Madeline Steiner of Nomura– Initiating Coverage on J.C. Penney Company, Inc. (NYSE:JCP) with a Reduce Rating and a $5 Target Price.
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Under the return to the leadership of Mike Ullman, J.C. Penney Company, Inc. (NYSE:JCP) has made progress coming out of the abyss and has stabilized some of the declines in the business. However, we continue to believe that much of the market share loss over the last seven quarters is largely permanent and will be very challenging to regain. While there has been significant merchandising transition in the stores, we have not seen a sustained pickup in traffic that will lead to a top-line recovery story. We also remain concerned with the initiatives planned to drive improvement in the home business.
J.C. Penney Company, Inc. (NYSE:JCP) sales
With a loss of nearly $5bn in sales in 2012 and 2013, we believe a sales and market share recovery will take much longer than many may anticipate. We believe the J.C. Penney customer has migrated to other department stores and off-price retailers, and we believe these shifts could be difficult to restore. The company has posted negative comps for the first three quarters of the 2013, which are down off of significantly lower volume, yet they have shown some sequential improvement including our expectations for a 2% gain in 4Q13E. However, we note this gain is up against a 31.7% decline in 4Q12 and trends on a two-year basis remain pressured. We are estimating losses of $6.00 in 2013E and expect the company to generate an earnings loss again in 2014E of $3.00.
With the $2.25bn of borrowings in 2013 as well as the additional $786mn of equity capital, the company’s near-term financial position remains on solid ground, and we expect the company to have ~$2bn in liquidity at year end with no significant principal payments required until 2015. However, our 2014E cash burn assumption of $700mn, even with working capital as a source of cash, suggests there are in fact a wide range of outcomes.
J.C. Penney Company, Inc. (NYSE:JCP) conclusion
While the shares are down 94% from all time highs of $86.35 and hovering near all-time lows, we do not see an easy or sustained path higher for the shares. The equity raise in 2013 was extremely dilutive and has taken away a significant portion of the equity upside and earnings power for the company, in our opinion. We cannot foresee a quick recovery of the business or the shares and see better values within our coverage.
