J C Penney Company Inc (NYSE:JCP) is up nearly 5% today after J.P Morgan analyst Matthew Boss released some analysis that, despite holding his Neutral rating and $11 price target in place, explained how he thought the retailer could benefit from major restructuring next year.
“The JCP story stands at a pivotal crossroads with today’s mid-single-digit top-line pace of recovery questioned versus the 33% revenue drop the past 3 years,” Boss writes, before explaining why “Neutral-rated JCP sets up well for a long trade through year-end.”
Closing 100 J C Penney stores would add $150 million to EBITDA, says Boss
The core of Boss’s argument is that he thinks a large-scale restructuring with 100+ store closing is both likely and a smart move for J C Penney Company Inc (NYSE:JCP) as it works to bring its margins back toward peak 2006 levels. Looking at the 33 store closings in January 2014, Boss has modeled $2 million in cost savings and $1.5 million of bottom line EBITDA accretion for every store that was closed. By that math, closing 100 out of the 1060 store base would add $150 million to EBITDA and $3 to equity value, assuming an industry average 6.6x multiple.
“Importantly, with the fixed cost hurdle reduced (distribution / buying right sized in GPM w/ occupancy, rent & ad spend in SG&A), every incremental sales dollar would fall to the bottom line at a structurally higher margin into FY15,” says Boss, adding that even that could be a conservative estimate because the model doesn’t account for incremental sales that go to nearby locations or the J C Penney Company Inc (NYSE:JCP) website, or additional cost saving measures that become possible during a larger restructuring.
Boss expects that something along these lines will be announced at this year’s analyst day slated for October but hasn’t included this restructuring option into his $11 price target (currently $10.73).
Ullman’s game plan underway, says Boss
Boss also seems to have a generally positive opinion of J C Penney Company Inc (NYSE:JCP) management, who has managed to get clearance back below 15% of sales and private label merchandise (which usually has better margins) close to 50% of sales after years of moving the opposite direction under the previous management. He doesn’t see how the retailer would return to previous peak performance without a major restructuring, but that only feeds into his opinion that the current management will do what’s necessary to improve EBITDA.
“The JCP roadmap is showing signs of stabilization with same-store sales returning to positive territory and margins roughly 800bps below 2006 prior peak,” Boss writes, adding that “CEO Ullman’s game-plan is under way.”