J.C. Penney Wants This Turnaround Done

NEW YORK (TheStreet) - J.C. Penney (JCP) just wants this turnaround completed already, and management is pushing for it to happen by the end of the year. The tone on last night's conference call was that J.C. Penney's management is getting more aggressive in making the turnaround happen.

"Today, the most challenging and expensive parts of the turnaround are behind us and the work we did in 2013 has laid a foundation for continued progress in 2014," CEO Mike Ullman said on last night's fourth-quarter earnings conference call.

The company has said that the "turnaround would come in three phases: the immediate stabilization phase, followed by a phase rebuilding and then the go-forward phase positioned JCPenney for long-term growth. Over the last 10 months, we completed the first two phases of our turnaround in a very tough and highly competitive environment and this year [we are] progressing [the go-forward] phase," he added.

If J.C. Penney's plan works out and goes according to schedule, this will not be your mom's J.C. Penney stores when it comes out the other side.

First on the gross margins, Ullman and team have been working to get rid of brands that were not resonating with customers and return those that were popular in the past. In the fourth-quarter, the company decided to facilitate the final push by discontinuing certain merchandise brands that were not part of its "go-forward merchandising strategy."

Those brands include JCP Men's, Stafford Prep, JOE by Joseph Abboud, William Rast, Joe Fresh Kids and jcp Everyday. The company is also shrinking merchandise assortment from brands such as Joe Fresh in women's apparel, Michael Graves Design, Conran and others in the home department.

Of course that meant that gross margin in the fourth quarter took an extra hit because of it, but Ullman and team are not apologizing.

Yesterday, the Plano, Texas-based retailer reported GAAP net income for the January-ending quarter of $35 million, or 11 cents a share. On an adjusted basis, the company reported a loss of $206 million, or 68 cents a share. Consensus estimates, according to Thomson Reuters, had called for an 85-cent quarterly loss.

Gross margin, while an improvement to 28.4% from 23.8% year over year fell from 29.5% of sales in the third quarter. J.C. Penney had said during third-quarter earnings that it expected gross margin to improve sequentially. Approximately 190 basis points of the decline was due to the discontinuation of the brands.

"We decided after we had given the guidance that as we thought about the go-forward phase, if we really want to finish off the rebuilding phase, let's put behind us the things that the customer really doesn't expect to see in JCPenney. So that did affect our margin and that explains the difference," Ullman said on the call.

Next, Ullman says that some of its smallest stores are the most profitable, and while they plan to close 33 underperforming stores (which of course means some staff firings), that doesn't mean they aren't investing in new digs.

Ullman specifically noted the company plans to open up a store in Brooklyn, N.Y. in the spring. Though he did not share specs on the store's size, in an urban neighborhood like that, it's fair to say it won't be the sprawling carcass that some J.C. Penney stores are today.

It's likely that J.C. Penney will focus on smaller stores going forward.

J.C. Penney is also putting the finishing touches on the reset of its home store - something that former CEO Ron Johnson took apart, rebuilt ... and killed.

"[In] just a few weeks, we will be completing new look our home store. This includes the extensive remerchandising the Home Department has been that underway [with a] renewed focus on bedding and bath, small electrics, as well as decorative accessories will offer the best value and home furnishings anywhere for the range of merchandise will better fit our customers' budget and their lifestyle," Ullman noted.

TJX's (TJX) HomeGoods as well as Target (TGT) could have some additional competition now.

Lastly, digital offerings are a must and J.C. Penney is looking to "accelerate" its growth in the omnichannel experience.

Earlier this month, J.C. Penney hired former Saks CIO Mike Rodgers to fill a newly created position of Senior Vice President of Omnichannel Strategy and Execution. Rodgers' task will be to integrate digital capabilities and marketing between stores in jcpenney.com, Ullman said. "Customer experience from marketing, to browsing to check-out has to be seamless across channels and that's what we are working toward."

Finally, and most importantly, investors seemed to be relieved after last night's call, particularly because management inferred that a large capital raise is not in the cards in the near future, and frankly, neither is bankruptcy.

Shares surged 24% to $7.37 at last check on Thursday.

J.C. Penney said it plans to end 2014 fiscal year with $2 billion in liquidity, compared to 2013, when it ended with just over $2 billion in liquidity.

CFO Ken Hannah said "we have visibility of positive free cash flow results under our existing strategy and we have access to the resources we need under our existing agreements to complete our turnaround," however management remained elusive on the timing of when for free cash flow.

"We anticipate to complete the turnaround in 2014, and if we completed well, we would [see] free cash flow positive. I think it is too early to be very, very specific, but I think the liquidity guidance we gave you gives you the comfort that we are not burning cash in the process of finishing the turnaround," Hannah said on the call.

Even Wells Fargo Securities analyst Paul Lejuez, who has been bearish on J.C. Penney since taking over coverage on the stock last May, upgraded shares to "market perform" from "underperform" on Thursday.

"JCP's FQ4 was weak, but there was some good news. Investor fears of an imminent large capital raise or a change in corporate structure seems to be off the table in the near term," Lejuez writes in a note to clients. Lejuez raised his fiscal 2014 estimates to a loss of $3.17 from $4.37 and raised his valuation to between $6 and $7 from $4 to $5.

Management took a "more confident tone, giving decent F14 guidance that featured comp and [gross margin] improvement. FQ4 expense savings seem permanent and are expected to flow through to F14," he writes. "In further discussions with [management], we learned there is no planned time frame to achieve [free cash flow] and the $400MM accordion feature is included in their range of ways they can achieve $2B in liquidity by year-end. While we can still argue that the stock may not present much value to equity holders, the company itself seems to be standing up better that many previously thought, which we believe warrants a Market Perform rating, as the stock is likely to move higher in the near term."

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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