On its Q2 2013 earnings call yesterday, the J.C. Penney Company, Inc. (NYSE:JCP) executive team emphasized the importance of rebuilding brand loyalty and bringing back its core group of customers with frequent store promotions and sales. Mike Ullman, CEO expressed the hope that things would improve for the company, stating that according to a Wall Street Journal study “we had the second best Back to School online business behind Walmart (see our recent WMT earnings analysis published last week) that tells us we’re back in the game and we expect to be in the game all the way through the rest of the year.” Like other retailers J.C. Penney is struggling with declining traffic in addition to operational issues; earlier this year the retailer fired its new CEO and also suffered from a credit squeeze issue. Today the company stock had dropped over 4% at the time of writing this article.
Get the full fundamental analysis for JCPenney
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
Based on the preliminary financial results for the quarter ended 2013-07-31, we analyze J. C. Penney Company, Inc. relative to its peers (scroll to the end of the post for the list of peers). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
|Quarterly (USD million)||2013-07-31||2013-04-30||2013-01-31||2012-10-31||2012-07-31|
|Revenue Growth %||1.1||(32.2)||32.7||(3.1)||(4.1)|
|Net Income Growth %||N/A||N/A||N/A||N/A||N/A|
|Net Margin %||(22.0)||(13.2)||(14.2)||(4.2)||(4.9)|
|ROE % (Annualized)||(90.4)||(46.1)||(66.2)||(13.7)||(15.5)|
|ROA % (Annualized)||(21.3)||(13.8)||(21.4)||(4.5)||(5.4)|
J.C. Penney valuation drivers
J. C. Penney Company, Inc. trades at a lower Price/Book multiple (1.3) than its peer median (2.0). J.C. Penney’s earnings and EBITDA are both negative which suggest that P/E or Price/EBITDA are not meaningful to make this analysis between operating advantage (ROE) and growth expectations (as suggested by P/E or P/EBITDA).
The company does not seem to have a viable operating strategy as is evident from low net profit margins(currently -13.3% vs. peer median of 4.9%) and poor asset turns (currently 1.1x compared to peer median of 1.5x). We classify this operating model as problematic relative to its peers. JCP’s net margin is its lowest relative to the last five years and compares to a high of 3.1% in 2009.
Growth & Investment Strategy
J. C. Penney Company’s earnings and EBITDA are both negative which suggest that P/E or Price/EBITDA are not meaningful for an analysis between historical growth (using annualized three-year revenue growth) and investor growth expectations (as suggested by P/E or Price/EBITDA)
The company’s annualized rate of change in capital of -9.0% over the past three years is less than its peer median of -3.3%. This below median investment level has also generated a less than peer median return on capital of -4.1% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.
J.C. Penney’s reported relatively weak net income margins for the last twelve months (-13.3% vs. peer median of 4.9%). This weak margin performance and relatively conservative accrual policy (6.2% vs. peer median of 3.3%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.
The company’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildupin reserves compared to its peers.
JCP Peer Set
We the following peer-set: Macy’s Inc (M), Kohl’s Corporation (KSS), Nordstrom, Inc. (JWN), Sears Holdings Corporation (SHLD), Dillard’s, Inc. Class A (DDS) and Saks Incorporated (SKS).