(By Mani) The turnaround at J. C. Penney Co., Inc.
) is taking shape under CEO Ron Johnson, who joined the department store chain in late 2011 and began to steer the beleaguered chain down a path of significant transformation.
The chain, which is in the midst of one of the biggest turnarounds in the history of retail, is abandoning its increasing reliance on aggressive short-term price promotions and revamping its stores to better assort a wider selection of higher quality and often unique branded items.
J.C. Penney operates about 1,100 department stores in 49 states and Puerto Rico selling apparel, footwear, home furnishings, accessories, fashion and fine jewelry, and beauty products.
A key lieutenant of Johnson left the company after less than a year on the job, and results thus far have tracked weaker than initial forecasts.
"In our view, the challenges that have weighed on JCP lately reflect primarily transitional issues at the chain. We believe firmly that behind a lot of noise a successful recovery is beginning to take shape at JCP," Oppenheimer analyst Brian Nagel wrote in a note to clients.
The company's key strengths are its store locations as the data shows that there is no direct competition from peer Macy's, Inc. (NYSE:M) in the majority of the areas. This should ease investors' concerns that head-to-head competition might significantly limit the potential for a meaningful recovery at J.C. Penney.
"We mapped the more than 1,100 stores that JCP operates across the country against Macy's and found that about 670 or 60% of JCP units do not operate in direct competition with a Macy's store," Nagel said.
In addition, the company's new store format is beginning to take shape. On Aug. 1, J.C. Penney launched the first six shop-in-shops with the Levi's, Arizona and Buffalo brands. On Sept. 1, the company began rolling out the next wave of shop-in-shops with the Liz Claiborne, IZOD brands. The company hopes to roll out 80-100 shops by 2015.
However, margin pressures likely to persist near term as traffic remains sluggish and clearance inventory remains elevated and transitioning customers from coupons and aggressive price discounts will take time.
In addition, the market sentiment for JCPenney shares still remains subdued as the analyst's checks suggest that new investors are not yet building large positions in the company, and short interest in shares remains very elevated. However, since mid-July shares of J.C.Penney were up 36 percent and outperforming gains of 3 percent and 7 percent in the S&P 500.
Meanwhile, the company continues to have sufficient liquidity on hand to fund the turnaround. The company also has access to a $1.5 billion credit facility and the ability to monetize more than $200 million in other noncore assets.
"We expect a return to profitability along with favorable working capital benefits to drive positive operating cash flows during the second half of the year," Nagel added.