Inside Wall Street: Time for long-term bet on Penney

Store renovations, new brands and pricing promotions will drive customer traffic and ultimately profitability.

By Gene Marcial Dec 14, 2012 2:23PM

Teen girl shopping copyright Vicky Kasala, Photodisc, Getty ImagesIt's time for dedicated long-term investors to take notice of J.C. Penney (JCP). The brand-name but besieged operator of more than 1,000 department stores in 49 states is finally starting to turn around -- and may be ready to blast off!

 

By now, everyone knows that Penney has been among the worst market performers in retailing, and is shunned by many, if not most, industry analysts. Apart from its much-criticized store renovations and an everyday low-pricing strategy initiated by new CEO and Chairman Ron Johnson, the company's e-commerce business is regarded as weak. Johnson was formerly a top executive at Apple (AAPL), and was responsible for its sleek and chic store format.

 

There’s been little Wall Street support for the store and pricing changes, causing JCP's stock to crash to a 52-week low of $16 a share on Nov. 16, 2012, from a lofty $43.80 in early February. Little wonder that the likes of Macy's (M)Target (TGT), and Amazon.com (AMZN) are more attractive to investors looking for opportunities in the retailing sector.

 

But JCP has reversed gear in recent days, inching up to $20 by Dec. 13, and some loyal investors see the stock rallying further from here.

 

"The JCP turnaround is still in the very early stages and remains fluid, but we are optimistic that over the longer term the strategies of CEO Ron Johnson and his team will eventually produce a more profitable chain," says Brian Nagel, analyst at Oppenheimer. He rates the stock as outperform, with a 12-month price target of $30.

 

Data suggests that JCP is adopting a more nimble stance toward price promotions and other initiatives, while maintaining the integrity of new brands in stores, says Nagel.

 

The analyst acknowledges that his outperform recommendation is a speculative call on the company's turnaround prospects, but it also reflects "our constructive longer-term outlook." He notes that the company has been running more time-sensitive and aggressive promotions that could greatly improve customer traffic.

 

"The company's aggressive strategic repositioning will ultimately produce a more profitable chain and a higher share price," Nagel asserts. It has increasingly been making bold efforts to display more value to consumers by marking down prices on many items earlier. For example, winter merchandise is being marked down at the start of the cold season.

 

"JCP ran a sale for 20-30% off outerwear this past weekend," notes Nagel. As the company is still  in the early stages of the turnaround, "it makes more sense to be more aggressive earlier in the season instead of heavily discounting and clearing merchandise later."

 

Obviously, what JCP is doing requires more patience from investors and its customers, says Nagel. The recovery taking shape will reward shareholders over time.

 

Already, the remodeled areas of JCP stores are performing well, with sales productivity in the new "shop-in-shops" more than 30% ahead of pre-reset levels, notes Nagel. Many of these showcase merchandise and brands new to JCP stores.

 

However, JCP still faces pervasive negative sentiment towards the changes. Short-sellers have been having a ball with JCP's stock, with about 30% of the float, or shares in public hands, being held short. But once the stock starts to perk up, the shorts will have to cover their positions, further fueling the recovery.

 

"We continue to believe the company can earn at least $3 a share over the long term," says Nagel. "But we recognize that following recent fundamental missteps, it will require more time for JCP to ultimately reach this objective," he adds.

 

No doubt, JCP is undergoing one of the most challenging but significant transformations in the history of the industry. But the JCP story is also one of retailing's more attractive longer-term investment opportunities.

 

"While we expect the company to benefit in the long run from restructuring, we don't see business materially improving until fiscal 2014 (ending Jan, 31 that year) at the earliest, given execution risks, a tepid economic recovery, a cautious moderate-income consumer, and intense competition," says Jason N. Asaeda of S&P Capital IQ. He rates JCP a "hold."

   

That may be true, but investors who wait for more evidence of the turnaround could miss the big upside move. In other words, by the time it becomes entirely clear that JCP is back on its feet, the stock will have already achieved much of its turnaround potential. It's the same risk-and-reward conundrum: the greater the risk, the greater the reward. Analysts expect JCP, which earned $1.35 a share in fiscal 2011, to post losses this year and next as it continues to execute its new strategic plans. But Oppenheimer foresees earnings of $1.85 the following year.

 

While near-term challenges are likely to persist, but JCP bulls are also optimistic that a much more profitable company will emerge. S&P's Asaeda figures JCP will earn $1.15 a share in fiscal 2014.  




Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.    



 

   

10Comments
Dec 15, 2012 8:19AM
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All you have to do is talk to women. They are not shopping at JCPenny. If women don"t shop there then they are doomed.


Dec 14, 2012 3:15PM
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We haven't shopped at JCP since the new management took over.  We aren't enamored of the new setup.  They have changed over the years.  I still have a JCP leaf rake, and trouble light back when they sold eveything to all people.  MOntgomery ward went by the wayside, Sears is cutting back, someone has to entice customers, JCP isn't doing it for us yet.
Dec 16, 2012 9:51AM
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Penney's is the way of the future. Most people just don't see it yet. Like it or not all stores will be following their foot steps. Change is always hard to accept.
Dec 17, 2012 1:53AM
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If JCP only sells on price alone, they will always lose to Wal-Mart.

Is the shop-in-shop a good idea? I don't know, but I wish they would sell more Made in USA goods. How about a Made in USA shop-in-shop? I can see it with an authentic Americana flavor, and that's on trend now in the high end market. What the heck are they waiting for?

Regardless, JCP revival is going to depend on the economy more than some other retailers because it's more of a store for the middle class and working class than it is for consumers who have bigger bucks who can spend them at stores like Nordstrom and Saks.

Dec 19, 2012 9:13AM
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Well, with those thoughts from Oppenheimer, it doesn't sound like a stock that needs to be bought at this exact moment in time. If investors wait they may have missed the big upside move? Goodness, to invest I would hope that there was more upside to the stock than the first signs of hope in it.... A good stock is a good stock and if the first signs of hope are missed, the stock should continue to do well on past that point.
Dec 15, 2012 8:59AM
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I love the new JCP.  The set up is very easy to shop, and the selection is perfect. This will be my go to place when I buy cloths.  When I mentioned my shopping experience to my co-workers they also agreed that they love the new JCP,  for the same reasons.


Dec 16, 2012 7:15PM
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Sorry... no. We actually WANT a JCP, we actually DO NOT WANT Wal-Mart but you have to pick one or the other. Wal-Mart is a wholesaler invading the retail marketplace. It killed off every mom and pop store in every small town and bullied brands to bottom-out pricing. JCP is just a store trying to be the store it was amidst the carnage Wal-Mart created for all retailers. We don't shop at JCP- because it's just imported clothing with a brand sewn on it. The new shoe label is an embarassment. The Levi thing is ridiculous. Think about it this way... if we restored jobs, no one would voluntarily shop at Wal-Mart. That said, we wouldn't shop at JCP unless it dumped the imported crap and supported America again. Need a cherry on top? If our taxes go up in January, people walk away from corporate jobs because they are already under-paid over-worked. If the CEO is rich everybody else lives in poverty thing doesn't go away, we won't be shopping at JCP or Wally World... we'll be at war. Penney's... it's American-Made or the Bankruptcy Court. Notably, I did that forecast using commonsense and eyes, shove your spreadsheets where the sun don't shine, Wall Street.  
Dec 17, 2012 12:27AM
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It's Christmas time and there are shoppers all over looking for sales and bargains and they should just ignore jcp as a nonentity,with no bargains,no sales and everybody undercutting their prices .Jcp is yesterday and their new ceo is just being contemptuious towards shoppers,arrogant even.
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