J.C. Penney: More Upside Ahead

Shares of J.C. Penney (JCP) have risen 50% since the beginning of the year as the retailer continues to outperform market expectations. In fact, Penney has beaten the market's estimates by strong margins in the last two quarters, which is why it is not surprising to see that its shares have appreciated remarkably this year.

What's driving growth?

Penney's growth is being driven by an impressive improvement in its comparable store sales. Last quarter, the company saw its comparable store sales grow 4.1% due to strong results from Sephora stores.

In comparison, Penney had recorded 3.4% same store sales growth in the first quarter. This is in contrast to its rival Macy's (M), which witnessed negative same-store sales performance of 2.1% in the second quarter of 2015. In fact, it's same store sales, including licensed stores, declined by 1.5% in the second quarter.

Thus, Penney is outperforming its rivals, and I believe that the trend will continue in the future. This is because Penney plans to roll out additional Sephora stores inside its stores in the second half of the year, which will enhance its same-stores sales further. This is a good move as Sephora is a well-recognized brand that will improve traffic. Also, the deployment of Sephora stores will help Penney improve sales of its household items.

Additionally, the retailer has re-energized its salon business. It has rebranded its existing salon under an in-style brand, testing the concept initially in 10 stores. The pilot has worked well, which is why Penney will improve the reach of the brand to more stores. These moves will help Penney improve the transaction count and average ticket size. Moves such as these will help Penney achieve its full-year guidance of 4% to 5% comparable store sales growth.

Costs-cutting efforts will drive its margins

Penney's cost-cutting efforts are helping it improve its margins. The company improved its gross profit margin by 100 basis points to 37% last quarter as its SG&A expenses were down about $63 million, or 310 basis points. This also helped Penney improve its EBITDA by 28% to $115 million last quarter.

Looking ahead, the company expects its gross margin to increase 100 basis points to 150 basis points for the full year. At present, it is undertaking various initiatives that will improve its gross margin. These initiatives include the expansion of private-label brands in its product portfolio. This expansion will be backed by strong relationships with suppliers to source low cost products. Also, Penney is concentrating on the efficiency of its supply chain that will enhance its gross margin. All in all, Penney sees an improvement of about $600 million in its EBITDA in this year.

Focus on supply chain efficiency

J.C. Penney should benefit from its recent investment in the Oracle system and supply chain efficiency. The retailer expects the new system to help its teams better merchandise its stores and distribution centers, while optimizing the size, merchandise planning efforts, and the location of its assortments. The company expects these tools to not only become more useful but also more powerful, resulting in fewer markdowns.

Conclusion

J.C. Penney seems to be gaining momentum through its various initiatives that should lead to a better performance in the future. Most of its initiatives have started delivering results. As a result, it is not surprising to see that analysts expect its earnings to grow 53.90% this year and about 66.70% by next year. Hence, I think that Penney will be able to sustain its impressive financial growth going forward, so investors should continue holding on to the stock.

Published on Sep 6, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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