Citi Research published a report today, April 8th, focused on the ongoing turnaround at J.C. Penney Company, Inc. (NYSE:JCP). Analysts Oliver Chen, Maryana Pleskanka and Nancy Hilliker crunch the numbers and make a convincing argument that the once-beleaguered retailer is well on its way to righting the ship.
The Citi analysts currently rate J.C. Penney Company, Inc. (NYSE:JCP) a Buy, and have placed an $11 price target on the stock.
J.C. Penney: Back to the basics
The Citi report concludes that J.C. Penney Company, Inc. (NYSE:JCP) has become a “going concern.” The analysts flesh out their bull thesis below: “In our view, what’s going to drive comp & healthier margins: (1) home department which is ~12% of mix and had severe space/product disruptions in 1H13; a revamped Home Collections at J.C. Penney has better price/value, renewed focus on bedding/bath/small electrics & decorative accessories; (2) fixing kids (~12% of mix), which was disrupted in 2H13 given space allocation to ideas which did not resonate; and (3) bringing percentage of clearance & merch. margin in-line with historic levels.”
Better merchandise means less clearance markdowns
The crux of Chen, Pleskana and Hilliker’s bull thesis is better merchandise selection from J.C. Penney Company, Inc. (NYSE:JCP). They anticipate much less merchandise having to be marked down for clearance in 2014, which will in turn drive a significant increase in earnings.
The analysts quantify how less clearance merchandise could have a positive impact on the bottom line. “We believe 2014 could experience a lower 15% of clearance mix at a -5% merchandise margin, this difference would drive +570bps of upside in 2014 vs. 2013. The sensitivity is about +/- 15bps per +/- 1% difference in markdown levels or ~+/- 75bps for each +/-5%.”
The report also sketches out a base case and a bull case detailing the potential upside of reducing clearance merchandise. “An illustrative base case is 15% of clearance at -5% margin vs. 2013’s 20% of clearance at -20% margin (or +570bps of upside) and a bull case, back-to-classic JCP, would be 15% clearance at a +8% merchandise margin (or +765bps of upside vs. 2013).”
J.C. Penney Company, Inc. (NYSE:JCP) is trading down two cents at $8.86 as of 12:09 PM EDT today.
