J.C. Penney Company, Inc. (JCP) ‘Long Road Ahead’: Nomura

J.C. Penney Company, Inc. (JCP) ‘Long Road Ahead’: Nomura

J.C. Penney Company, Inc. (NYSE:JCP)’s finally had some good news for shareholders on Friday, reporting its first sales growth in years last quarter, but the retailer’s EPS was still a $1.16 loss for 1Q14 and the initial boost in stock price may have been stronger than 1Q14 earnings deserved as a full recovery is still a long way off.

Revenue and margins improve, but JCP is still losing money

J.C. Penney Company, Inc. (NYSE:JCP) reported that first quarter revenue was up 6.3% year on year to $2.8 billion and comp sales were up 6.2%, with sequential increases every month of the quarter (following a disappointing holiday season). Online sales were also up 25.7%, and comps should come in at around 4% for the year, estimates Nomura analyst Robert Drbul.

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Gross margins improved year-on-year from 30.8% to 33.1%, and operating margin improved from -15.7% to -8.6%, though it will need to continue to execute to push operating margins into the black. Gross margins were hurt by clearance sales (some of which sold at a loss) becoming a larger percentage of total sales. Drbul expects J.C. Penney Company, Inc. (NYSE:JCP) to move back to an 85/15 split in regular and clearance prices but this represents one of the clear risks to the JCP bull case.

J.C. Penney still needs to recover market share it lost to discount names

Another problem is that J.C. Penney Company, Inc. (NYSE:JCP) has lost a lot of market share to discount retailers like Marshalls and TJ Maxx over the last two years, and retail traffic is notoriously sticky. While comps are up compared to last year, they are still expected to be down 3.2% for 2014 on a two-year basis. In other words, the only reason this quarter’s sales figures look good is because 1Q13 was so bad. J.C. Penney Company, Inc. (NYSE:JCP) CEO Mike Ullman has done a lot of work to repair the damage done by his predecessor, but there’s plenty left to do.

“There could be a long road ahead, in our view, given the significant market share lost during 2012 and the first three quarters of 2013,” writes Drbul.

Since J.C. Penney Company, Inc. (NYSE:JCP) still has a negative EBITDA and annual earnings losses, using P/E or EV/EBITDA to value the company doesn’t make sense (though it might persuade you to stay away). Instead, applies a price-to-revenue multiple of 0.4x to 2014E revenues of $12.1 billion (a moderately low multiple compared to other broadlines). Drbul has raised his price target for J.C. Penney Company, Inc. (NYSE:JCP) from $5 to $8 to reflect the change in revenues, but he still maintains a Reduce rating for the company. Stock prices recently jumped from $8.37 to $9.73, but have started falling again in trading today.

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