J.C. Penney's Turnaround Will Soon Turn Ugly

J.C. Penney (JCP) has staged an impressive turnaround as of late, but I wouldn’t be so sure of the company’s future prospects so soon. J.C. Penney has been a range-bound stock for a very long time, and although the company has made progress under the new CEO, I think its turnaround is still a long shot.

Amid the weak retail sales environment, I wouldn’t suggest investing in retail stocks, and J.C. Penney is no exception. J.C. Penney is expected to report its earnings report next week, and I am currently bearish on the stock.
Since J.C. Penney is trading at the bottom-end of its range band, I wouldn’t say the stock is a short right now, however, I would advise against initiating a short position in the stock heading into earnings.

Street estimates

For the quarter, Wall Street analysts are expecting J.C. Penney to post earnings of -$0.36 per share. The retailers losses are expected to shrink greatly as it reported loss of $0.57 per share in the year-ago period. On the revenue front, J.C. Penney’s revenue is expected to grow 2.7% year over year to $2.93 billion.

J.C. Penney losses have gone down only because the company has slashed its workforce and reduced its expenses greatly. Although J.C. Penney’s revenues are expected to jump on a year over year basis, investors should count on it. I think there’s a strong chance of J.C. Penney reporting worse-than-expected sales in the upcoming quarter, which in turn will push the stock lower.

Moreover, the retail sales in the U.S. fell in March as households cut back on purchases of automobiles and other items, I have been bearish on the stock market due to the absence of growth drivers and the retail sector shrinking further indicates that the economic growth fell in the first quarter.


J.C. Penney is currently trading at just 0.22 times trailing sales. While the stock may look cheap considering that it is a turnaround candidate, I think investors should still stay away from it heading into earnings. A weak retail environment and high debt make J.C. Penney a very risky investment. Although J.C. Penney has managed to slash its expenses, its towering debt and high interest expense make the stock un-investable for the time being. Investors with an appetite for risk can also consider buying put options heading into earnings as I am quite confident that the retailers sales will come in light.
Published on May 9, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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