When Will This Retailer Turnaround?

Weeks before J.C. Penny ( JCP) shares dropped, analysts reduced their outlook in the company. Morgan Stanley (MS) cut its earnings estimates for the fourth quarter to negative $0.54 per share, and fiscal 2015 earnings from $1.75 to just $0.30. Credit Suisse rated the company as an “underperform.” Shares raced as high as $22, as cost cuts of 300 jobs were revealed on February 22.

Things quickly turned south after the company reported quarterly results that missed estimates. In the fourth quarter, earnings dropped to -$0.24 per share, missing estimates by $0.06. Revenue missed estimates by $200 million, coming in at $3.884B. In the quarterly earnings video call, the company provided no guidance for this quarter, adding to more uncertainty.

 

Two negative points to highlight are: online sales declined 34%, while comparable store sales dropped 31.7%.

Volatility for options was high, ranging from the 60’s to 91.2%:

Screen shot 2013-03-08 at 11.40.46 AM

J.C. Penny closed the quarterly with cash levels below its target $1 billion. Investors should expect cash balances to decline in the current quarter.

Analysis and Conclusions

The retail environment is no doubt getting tougher. Wal-Mart (WMT) experienced weak February sales, but J.C. Penny is need of fundamental change. Unlike other retailers in the midst of a turnaround, like Best Buy (BBY), J.C. Penny has yet to find a formula that will reverse declining sales. Electronics retailer Best Buy illustrates the reversal does not need to be drastic. The retailer combatted competition from online stores by making price-matching permanent. This improved sales, but Best Buy can build a base from there. Consumers must take the initiative to obtain a price-match. Best Buy could proactively introduce traffic-generating products that are competitively-priced to begin with. J.C. Penny may have a leadership problem, because the CEO’s turnaround strategy is not working. Speculation that the company will find new leadership could help reverse the decline in shares.

Written by Chris Lau

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