J.C. Penney One Step at a Time: Giant Steps Likely to Come

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Bernard Sosnick of Gilford Securities is out with a new report on  J.C. Penney Company, Inc. (NYSE:JCP). In the report titled ‘J.C. Penney One Step at a Time: Giant Steps Likely to Come’. Sosnick states that  ‘the worst appears over’. Furthermore, he believes that improvement should be evident in 2Q/13 results. Clearer evidence of a turnaround in 2H/13 might trigger a rally to $20-$25 for J.C. Penney Company, Inc. (NYSE:JCP) shares. Inventory cleanup continued in 2Q/13. The analyst thinks ‘abnormal spring weather hurt sales and required markdowns of seasonal apparel, with more of it to come in July,’ additionally, he notes ‘gross margin was sacrificed to restart the sales engine.’ Further details from the report below.

See Many ‘male Fashionistas Shopping the Assortment with Overflowing shopping Carts’ at J.C. Penney: Citi

J.C. Penney One Step at a Time: Giant Steps Likely to Come

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The gross margin rebound might be modest in 2Q/13, Normalized markdowns and gross margin seems likely in the second half of 2013, along with significant profit improvement, but we cannot quantify that yet. Clearance markdowns normally ran about 15% of sales, 18% in bad times. Clearances rose from 15% in 1Q/12 to 17%, 23% and 24% in the following quarters. A normalized clearance rate of 15%-16% might be achieved in 2H/13. And markdowns should not be as steep.

Traffic in the stores was down 12% in 2Q/12 and 3Q/12 and 17% in 4Q/12. 1Q/13 traffic was down 6% and on a two-year basis down 16%. Shoppers are responding to the return of promotional inducements, as is evidenced by improved traffic on key shopping dates. Traffic seems better at other times too. Traffic is what promises better times to come. The return of St. John’s Bay, a moderate-price private brand, has been well received. Rebuilding basic inventories for kids should be complete by the start of back-to-school selling. Joe Fresh for kids will be added in July. Home departments have reopened and are contributing to sales, particularly online—Home had provided more than half of online sales.

Merchandise assortments in the renovated home departments look problematic to us and in need of realignment. Some of that might be accomplished in August if there is a normal home promotional event vs. none in 2013. Promotional events on Labor and Columbus Days should produce significant sales improvement in September and October, especially if Jack Frost were to arrive early.

J.C. Penney Faces The Macro-Economic Risks

J.C. Penney Company, Inc. (NYSE:JCP) faces the macro-economic risks normal to retailers but its greatest risks are internal. Financial risk will be the primary risk for shareholders, although that was eased by the receipt of $1.75bn from a new loan agreement. CEO Ullman’s first actions have been encouraging but that does not assure a favorable outcome for the company.

We believe J.C. Penney Company, Inc. (NYSE:JCP) is better positioned to rebuild sales than seems to be the prevailing opinion, but our premise remains to be confirmed. We cannot reliably estimate earnings at this point or be confident that JCP will become profitable. We believe changes in the Board of Directors are required, but cannot be certain this will happen. J.C. Penney Company, Inc. (NYSE:JCP) remains a risky situation. Investors should be able to accept abnormal risk and be willing speculate that a turn for the better is occurring.

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