J.C. Penney Will Be 2014's Best Retailer -- Is a Buyout Next?

NEW YORK (TheStreet) -- For the poor results seen among retailers this earnings season, weather has been the most commonly cited reason. So it comes as a surprise that J.C. Penney (JCP), which, for two years has been flooded by nothing but bad news and weak same-store sales, has weathered the storm as well as it has.

J.C. Penney is on the way to being one of the best performers of 2014 and a prime M&A target in 2015. 

The stock closed Thursday at $8.37, down 2.79%, and the shares are down 8.5% year to date. But that doesn't paint the entire picture. On Friday, the shares opened hugely, up 16.5% as of 10:15 a.m., to $9.75.

Since J.C. Penney shares hit an intraday low of $4.90 on Feb. 5, the stock has been on a steady upward march, up roughly 71%. And Thursday's results affirmed investors' faith that not only has this stock bottomed, but J.C. Penney is poised to be retail's best performing stock in 2014.

For the period ending May 3, the once-beleaguered retailer posted revenue of $2.8 billion, which topped Street estimates of $2.71 billion by 3.3%. Same-store sales, which track the performances of stores that have been open for more than one year, increased 6.2%.

Note that management had called for same-store sales growth in the range of 3% to 5%. Penney's beat the high-end of that target by 24%.

Calling this impressive would be a gross understatement -- considering that Walmart (WMT) just posted flat same-store sales results for its U.S. stores.

From an operational perspective, J.C. Penney posted a loss of $352 million, or $1.15 per share, which was better than the loss of $1.25 per share that analysts expected. Aside from beating Street estimates, this reflects a year-over-year improvement of roughly 30%, topping last year's mark of a $1.58 per-share loss.

There were doubts when J.C. Penney's board brought back former CEO Myron Ullman to replace the failed experiment of Ron Johnson. Credited for having built up Apple's (AAPL) retail concept, Johnson's transformative ideas did nothing but saddle Penney with losses and declining sales in his 17-month tenure. TheStreet's Rocco Pendola summarized the Johnson era at J.C. Penney "a national disgrace."

Ullman didn't make any promises when he took over as CEO last year. But whatever he's doing is working. Shoppers have bought into his merchandising ideas and sales promotions. It seems they're willing to enter the stores come hell or high water. For that matter, a little snow and freezing weather couldn't stop them.

It remains to be seen how long this resurgence will last. But management guided with confidence. Aside from improved gross margins, management projects mid-single-digit increases in same-store sales and free cash flow at breakeven.

I'm not ready to say that all of the risks that this company has dealt with are gone. But it's safe to say that the worst is over and J.C. Penney is no longer the Street's punching bag.

From an investment perspective, seeing the recent surge since the February bottom, the easy money on this stock has already been made.

That said, investors willing to hold these shares for the next 12 to 18 months can still do well here. With ongoing restructuring efforts to cleanup its books and cutting costs, J.C. Penney will emerge not only as 2014's best-performing retailer, Penney is building itself to become a prime takeout candidate in 2015.

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At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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