Citi on JCPenney Meeting: “Wish I Knew Then What I Know Now”

Citi on JCPenney Meeting: "Wish I Knew Then What I Know Now"

J.C. Penney has not been having a great week to say the least. Reports that Vornado wants to sell a large portion of its shares pushed shares down to the lowest levels in three years. Citigroup met with J.C. Penney Company, Inc. (NYSE:JCP)’s CEO, CFO and COO and have just put out a report titled “Wish I Knew Then What I Know Now”.

The analysts at Citigroup state that they are more concerned that JCP’s return to topline growth will take longer than
expected. They still “continue to be supporters of the company’s long-term vision”, including its shop strategy and new brand launches. However, they are less convinced that the course-correcting strategies being implemented around pricing and marketing will drive meaningful sales improvement.

While fundamentals remain challenging, Citi believes there is a potential for asset sales, a private takeover, and senior leadership changes.

questions Surround JCP’s Value Proposition — JCP’s current pricing (everyday prices + clearance) and promotional strategy have yet to resonate with the consumer.

Citigroup questions whether J.C. Penney Company, Inc. (NYSE:JCP)’s aggressive pricing on key value items (such as $5 swimwear separates versus Target at $14) lacks pricing integrity for core customers.

Risk to Home Transformation — Citi believes that plans could further be derailed pending the outcome of Macy’s lawsuit against JCP and MSLO. They estimate that 30% of home SKUs were to be branded or designed by Martha Stewart, and JCP has already made substantial inventory commitments to this product.

Limited Analytics — A lack of analytics and testing has led to some misguided decisions. Some internal changes could improve company processes.

Liquidity Concerns Mounting — Citi states that they “expect JCP to have to raise capital of $1B or tap the revolver to that amount to fund its transformation this year, further noting that “the company reiterated its expectations to spend approx. $1B per year on the transformation.”

Citigroup has lowered EPS estimates and price target for J.C. Penney Company, Inc. (NYSE:JCP). They have lowered their 2013 EPS est to (-$2.21) and lowered their target price from $22 a share to $15 based on Citi’s 2015 EBITDA est of. $1.0B and a 5x tgt EV/EBITDA multiple.