J.C. Penney Is Still Not Out of the Woods

Despite weak retail sales environment, brick-and-mortar retailers have been rallying this week thanks to Macy’s (M) stellar earnings. Macy’s was one of my top long ideas of 2016 and the rally isn’t that surprising given the stock’s undervaluation and the potential of its real estate.

However, other retailers like J.C. Penney (JCP) have also rallied in sympathy with Macy’s. J.C. Penney also reported its quarterly earnings last week, surpassing analysts’ estimates on earnings and meeting the revenue targets.
However, unlike Macy’s, I don’t think J.C. Penney can justify its rally as the company is still losing money and is in a lot of trouble. That being said, J.C. Penney did make some improvements in the last quarter.

The company’s same-store sales rose 2.2% on a year over year basis in Q2, whereas its gross margin improved 10 basis points to 37.1%. The company’s EPS came in at -$0.05, beating the consensus by $0.10. On the revenue front, J.C. Penney reported sales of $2.92 billion, which was in line with the estimates.

J.C. Penney expects comps to grow by 3%-4% for fiscal 2016 and also expect EPS to turn positive for the year.
J.C. Penney Is Still Not Out of the Woods
Image by fudowakira0 / Pixabay
Despite the progress, I don’t think J.C. Penney deserves to rally to above $10.

The primary reason why I am bearish on the company is its high debt. Since J.C. Penney is a highly leveraged company, it has high interest expenses. What’s more is that the company highlights the EBIDTA figure to show progress, which fails to take into account the interest expenses.

The long-term prospects of J.C. Penney still look weak as shoppers have increasingly preferred online retailers for their clothing needs. Even Macy’s management, over the conference call, said it would close 100 stores due to shoppers spending more on online stores.

The growth of online shopping is probably the biggest reason why J.C. Penney’s sales growth was underwhelming in the last quarter. Despite weak sales growth, J.C. Penney shares have crossed the $10 mark due to its results coming in better than expected. However, I don’t think the stock can sustain the $10+ valuation for long and will come crashing lower soon.

I was bearish on J.C. Penney before the results and recommended investors to sell the stock. However, after the post-earnings pop, I think J.C. Penney is a great short candidate. Due to the reasons mentioned above, I think the stock can’t sustain its current valuation, and therefore, is a short candidate.
Published on Aug 15, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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