Will JC Penney Shares Reboot Like Best Buy?

Chris Lau, Kapitall: Best Buy was able to recover from a difficult year in 2011, but can JC Penney shares pull off a similar turnaround?

JC Penney (JCP) rose by nearly 20% in the past week – a surprise considering the stock dropped precipitously over the last year. After hitting a 32-year low of $6.24 earlier this month, JC Penney is now trading above $8.30.

Shares rose after a mistaken quote that same-store sales will be positive this quarter. With bearishness at 76.8 million shares as of October 15, 2013, shares could move even more when JC Penney reports earnings on November 19.

Sales could rise

Last week JC Penney CEO Mike Ullman noted at the 2013 Women’s Wear Daily Apparel & Retail CEO Summit there were 30 things that were wrong with the company, and that two-thirds of them had been addressed after Ullman took over. Ullman also reiterated that comparable store sales in the last few weeks of the third quarter will be positive.

Then again, sales last year were very weak, so investors should have already expected an improvement of some kind, however modest.

Bankruptcy risks

Fears the company could go bankrupt drove JC Penney shares even lower. On the debt market, unsecured debt for JC Penney is valued at $0.65 on the dollar. To address these concerns last September, the company raised $800 million through an equity offering. This could give JC Penney ample cash to alleviate supplier worries for the company’s balance sheet.

Quarterly results in focus

Any surprising improvement in sales could be enough to ignite JC Penney shares. The company probably has around $2.3 billion in cash, but $4.85 billion in long term debt. If cash flow is not negative, JC Penney will have more time to reverse its operations. Once it finds solid footing again, the company may be in a better financial position in 2014.

Investors need only look to the story of  Best Buy (BBY), whose future as a public company was thought to be over amidst thousands of closings and massive layoffs that peaked in 2011. After improving its operations and focusing on growth areas like mobile, Best Buy shares soared:

Click on the interactive chart to see price data over time. 

Conclusion

The sharp 20% bounce from the $6.24 low might mark the end of the decline in JC Penney shares. The company is worth only $0.15 for every $1 in sales. As the holiday season approaches, the company needs to boost sales enough to heighten shareholder confidence. From there, short sellers may start covering their bearish position, and the recent lows could be a thing of the past.

Beyond the holidays, remodeled stores and new merchandising strategies may continue to bear fruit.

 

(Written by Chris Lau, a Kapitall Contributor. All data sourced from Zacks Investment Research.)

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