J. C. Penney: Time for Strong Growth Ahead

J.C. Penney (JCP) announced first quarter ended April 30, 2016 total net sales of $2.81 billion, down 1.6 percent year-over-year from $2.86 billion of net sales during the same period last year.

Penney declared first quarter of 2016 adjusted net loss of $97 million or $0.32 of adjusted loss per diluted share compared to an adjusted net loss of $173 million or $0.57 of loss per diluted share in first quarter of 2015. The company has also provided full year EBITDA guidance to be nearly $1 billion.

The global merchandise retailer reported continued year-over-year decline in its top line primarily due to a fall in the company’s comparable store sales for the quarter.

Improving cash flow  

Penney is continuously focused on optimizing its total cash position and on the right track to achieve $1.2 billion of consolidated EBITDA by expanding total EBITDA to over $1,200 million by 2017 while lowering net debt to EBITDA ratio from 5.4x in 2015 to below 3.0x in 2017.
The company targets on achieving this objective by uniquely retiring $300 million of maturities during 2016 and 2017, executing strategic sales of assets in the range of about $300 million to $500 million, deliver approximately $500 million of free cash flows over the period of 2 years.

Moving ahead, Penney has adopted several home growth efforts and pilot programs to enhance sales including window expansion through improvement and enhancement of presentation by about 25% in 500 key stores, redevelop earlier industry-leading standing in superior margin category and deliver ready-made hardware, rods, shades & blinds and curtains. The Ashley furniture brand is currently tested in 20 key locations with jcp.com started by the weekend of Memorial Day, planned testing of 21 Ashley Signature Design Collections, Ashley Furniture is arranged in stores and having the biggest Furniture presence by May 18. Further, the company is uniquely leveraging the brand reputation of Ashley and its complicated logistics network towards overall company growth.

The Empire Today Franchise is expected to start testing in two key markets on July 1 and is projected to occupy about 750 to 1000 square feet space in Home segment while offering well-sorted range of hardwood, carpet, tile and laminate.

The ongoing strategic efforts of Penney towards maximizing the free cash flows through expanding its year-over-year product sales while minimizing the non-core expenditures and total company debt is expected to strongly position Penney on the path for delivering sustainable long-term company growth while delivering attractive shareholder returns.

Penney has employed home strategic growth efforts for the quarter by planned rollout of innovative appliances through uniquely piloting 22 locations across 3 major markets, enhancing presence to more than 500 locations, phase wise in-store launching to start in July and getting live on JCP.com by mid-May, offering more than 1200 items from key brands viz. LG, GE, and Samsung.

Going forward, Penney has provided sales and earnings guidance for the complete fiscal year 2016 and estimates comparable store sales to be in the range of 3% to 4% and driven by new appliance launch in nearly 500 locations along with Sephora introductions across about 60 locations, gross margin is expected to be over 10 to 30 bps compared to last year and driven by shrinkage enhancement and significant private brand expansion, SG&A dollars is estimated to reduce compared to 2015 due to notable process improvements and controlled expenditures, EBITDA is expected to be $1 billion with positive adjusted EPS and solid cash flow growth over last year.

The impressively planned growth initiatives by Penney coupled with attractive cash flow improvements and controlled expenditures is believed to deliver long-term superior top line growth while offering attractive shareholder returns.

Penney’s customer loyalty foundation is based on its strategic framework comprising of strong private brands, superior omnichannel and notable revenue per customer. The private brand classifications include power brands, lifestyle brands and Niche brands. The key private brands provided with significant differentiation through proprietary design and exclusivity, impressive value with quality and style as well as maximize profits through continued enhanced penetration and major item supremacy.

The omnichannel growth effort of Penney includes the mobile segment for modernizing design to notably combine impressive store experience, enterprise fulfillment through deployment of innovative mobiles devices to every store for attractive customer servicing, enhanced assortment through key growth in the availability of brands, products and categories, enhanced same day collection capability to every store locations and improved supply chain capabilities through enhanced delivery speed for every customer.

The outstanding omnichannel capabilities in addition to superior brand development skills of Penney are believed to drive sustainable lasting company growth along with attractive investor returns.

Conclusion

Overall, the investors are advised to “Hold” their position in J. C. Penney Company, Inc. considering the company’s significant long-term growth prospects being supported by its notable and timely expansion initiatives but, currently weaker financial position with significant total debt of $4.73 billion against weaker total cash position of $415.00 million only, restricting the company to continue with its daily operations profitably. The profit margin of -3.43% indicate no profit but loss. The PEG ratio of -9.27 signifies no growth but decline compared to solid industry’s growth average of 1.25.
Published on Jun 10, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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