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J.C. Penney: Challenges To Persist For Near-Term

 November 21, 2012 03:50 PM

(By Mani) Near-term sales and earnings weakness are likely to persist at J.C. Penney Company, Inc. (NYSE: JCP) as the company continues to clear older and soon to be discontinued products absent an effective value message for those areas of the store.

The turnaround at J.C. Penney, one of the largest department store chains, has thus far proven more challenging than almost anyone imagined. A series of internal missteps has left JCP in a more challenged spot near term.

"We continue to believe that behind a ton of noise, recovery at JCP is taking shape. Challenges will persist and could intensify for JCP near term," Oppenheimer analyst Brian Nagel wrote in a note to clients.

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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.

In its zeal to execute the new JCP Shop-in-Shop strategy successfully, it has ignored the performance of the company's legacy departments and in the process impaired its "turnaround cash engine."

"We expect JCP to build cash in Q4 to about $830M before it again starts to burn cash to fund capex spending for new FY13 store within the store concepts. Per our forecasts, JCP could dip into its revolver in Q213/Q313 to fund seasonal working capital needs," the analyst said.

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The upcoming holiday season may prove a challenge for the company, which currently operates 12 shop--in-shop concepts in its larger box stores despite encouraging early results. The chain appears woefully under-positioned for the holiday selling season, and the wind-down of older areas within stores is not generating the cash initially expected.

However, the company and vendor commentary regarding new store-in-store concepts has been positive to date. Remodeled areas of JCP stores are performing well with sales productivity in the company's initial shop-in-shops tracking better than 30% ahead of pre-reset levels.

"We continue to believe the company can earn at least $3.00 longer term (vs. FY12E loss of $2.45), but recognize that following recent fundamental missteps, it will require more time for JCP to reach this objective," Nagel added.

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.



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