
J.C. Penney Still Risky Despite Recent Selloff
Shares of retail giant J.C. Penney (JCP) - Get Report have fallen some 15% in the past month, in part a reaction to the company's plans to layoff some 300 positions at its headquarters. This amounts to a 9% trim of its headquarters workforce, which -- on the surface -- would imply not only a potential cost savings, but also higher future profits. The market saw it another way.
It remains to be seen how these job cuts might improve J.C. Penney's near-term and long-term outlooks, but ahead of its third-quarter fiscal 2015 earnings results Friday, waiting to find out could be costly. Consider that despite the recent selloff, the stock -- up 28% on the year and 15% in the past 12 months -- has been a standout performer in a consumer staples sector that is up just 4% on the year. Shares of the Plano, Texas-based retailer have crushed not only the S&P 500 (SPX) , but also the SPDR S&P Retail ETF (XRT) - Get Report (which is down 5% in 2015).
The stock has a consensus hold rating and an average analyst 12-month price target of $10, around 17% higher than its current level in the vicinity of $8.50. But with almost 30% gains already on the table, it doesn't make sense to risk holding these shares ahead of its earnings report, especially amid the uncertainties about the company's competitive position. Not to mention, despite the implied optimism in its price target, J.C. Penney's earnings are projected to decline by a 2% average annual rate over the next five years.
And here's the thing: Based on the fiscal 2017 consensus earnings projection, which calls for a loss of 43 cents a share, the five-year consensus projections suggest that things may get worse for the company before they get better. From that standpoint, it would seem the gains the stock has made up to this point has been the results of J.C. Penney having beaten low expectations, not due to a bright outlook.
However, the company may find the year-over-year comparisons in the quarters ahead too high to exceed. Despite the accelerated pace of the company's overall recovery, that's when the stock will get punished. Investors therefore would do well to reduce their risk ahead of Friday's results.
For the quarter that ended in October, analysts' average earnings estimate calls for a loss of 55 cents per share on revenue of $2.88 billion, compared to the year-ago quarter, when the loss was 77 cents a share on revenue of $2.76 billion. For the full year ending January, analysts expect a loss of $1.22 a share, narrowing from last year, when J.C. Penney lost $2.67 a share. Full-year revenue of $12.60 billion would mark an increase of 3%.
To its credit, J.C. Penney has begun to show not only signs of operational improvements -- including higher operating income (up 120 basis point in second quarter) and higher gross margin (up 100 basis points in the second quarter) -- the company is likely taking market share from some competitors. Nonetheless, it seems these improvements are already priced into the stock. Beyond breathtaking results in the quarters ahead, which are highly unlikely, it's time for investors to move on.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








