J.C. Penney Still A ‘Show Me Story’ With Wide Risk-Reward: GS

Among the department store chain operators in the United States, J.C. Penney Company, Inc. (NYSE:JCP) is the most controversial and closely watched by analysts and investors alike.

J.C. Penney Still A ‘Show Me Story’ With Wide Risk-Reward: GS

Bill Ackman dumped J.C. Penney’s stake

Over the past few weeks, J.C. Penney Company, Inc. (NYSE:JCP) took the headlines when Bill Ackman of Pershing Square Capital Management dumped his almost 18% stake or 39.1 million shares in the company after resigning as director. He resigned when the board rejected his demands to accelerate the search for a new CEO to replace Mike Ullman and to ouster Tom Engibous, chairman of the company. The board called his behavior disruptive.

Analysts at Goldman Sachs Equity Research resumed their coverage on J.C. Penney Company, Inc. (NYSE:JCP) with a Neutral rating and a price target of $14 a share (10% upside). As of this writing, the stock is trading around $13.56 a share, up by nearly 7%.

J.C. Penney Company, Inc. (NYSE:JCP) is trading higher because of the recent significant investments in the company by hedge fund managers particularly Larry Robins of Glenview Capital Management and Kyle Bass of Hayman Capital Management.

Glenview Capital increased stakes in J.C. Penney

Glenview Capital increased its stake in J.C. Penney Company, Inc. (NYSE:JCP) from 8,431,879 shares to 20,060, 830 shares or 9.1% stake, making it the second largest shareholder. On the other hand, Hayman Capital 11,428, 450 shares or 5.2% stake in the company. Another shareholder in the company, Richard Perry of Perry Capital also boosted its position in the department store chain by 3 million shares bringing his stake to 8.6%.

The bullish move of the investors is a show of confidence that the current management of J.C. Penney Company, Inc. (NYSE:JCP) has the ability to turn around the embattled department store chain.

According to Goldman Sachs analysts Stephen Grambling and Christopher Prykull, J.C. Penney Company, Inc. (NYSE:JCP)’s clearance merchandise margin will go back to normalized level under its current management because of the return of promotions. However, the analysts emphasized that the company requires significant top-line growth to be able to make profits again.

J.C. Penney’s liquidity a possible turnaround

Grambling and Prykull projected that J.C. Penney’s existing liquidity will allow its management to execute a turnaround with two holiday sales. However, the analysts said larger than expected comp declines could make its cash burn faster.

“With comps still negative, J.C. Penney remains a show me story for us, with a wide risk-reward that is worth watching closely,” wrote Grambling and Prykull in a note to investors.

According to the analysts, the bull case for J.C. Penney Company, Inc. (NYSE:JCP) is that it has the potential reserves in its clearance levels through inventory management to be able to recover its consistent historical merchandise margins of 36% to 39%. The bear case is that the company needs two consecutive years of 5% to 6% comp growth to resume profitability even if gross margin rebounds. The analyst noted that over the past 20 years, J.C. Penney failed to achieve such comp growth.