J.C. Penney (NYSE: JCP) is an apparel and home furnishings retailer. Including its online presence, it has over 1,000 store locations across the United States and Puerto Rico, selling a broad assortment of products from a leading portfolio of private, exclusive and national brands.
The company recently announced its plan to close two distribution facilities and approximately 130 – 140 stores over next few months. This strategic decision is aiming towards helping the Company to align its brick-and-mortar presence with its Omni channel network, thereby redirecting capital resources to invest in locations and initiatives that offer the greatest revenue potential.
Management confirmed that closing stores would also enable JCP to effectively compete against the growing threat of online retailers. The company believes that it is essential to retain those locations that present the best expression of the JCPenney brand and function as a seamless extension of the omnichannel experience through online order fulfillment, same-day pick up, exchanges and returns amongst others.
The total store closures represent approximately 13 – 14 % of Company’s current store portfolio, less than 5% of total annual sales, less than 2% of EBITDA and 0% of net income. The annual cost savings resulting from these strategic decisions, are estimated at approximately $200 million. Nearly all impacted stores are expected to close in the second quarter of 2017.
Furthermore, JCP also announced financial results for its fiscal fourth quarter and full year ended January 28, 2017. It reported a net sales of $12.5 billion compared to $12.6 billion in 2015, a (0.6) % decrease. For the full year, the Company delivered a $514 million improvement in net income over the prior year. Despite, having a very challenging 2016 retail environment, JCP was able to deliver positive net income and generated EBITDA of over $1 billion.
Also, during March 2017, JCP partnered with industry’s leading manufacturers and service providers, such as Samsung and Trane®. JCP’s Home Services is planning to test six programs in select markets to establish its relevance and appeal among shoppers. As per the company, with the resurgence of the housing market, consumers are spending more than $300 billion annually to upgrade homes.
Therefore, there is this tremendous opportunity to capture additional stream of revenue and minimize dependence on the apparel vertical by catering services to female homeowners who represent over 70 percent of their loyal customer base, and make the primary decisions regarding any home renovations.
JCP is following these strategies to improve its results going forward. So that the long-struggling department store chain starts making gradual progress toward sustainable profitability. In fact, the improvements are already reflecting in the latest quarterly results of the company. Also, Standard and Poor’s Rating Services upgraded JCP’s corporate credit rating in March 2017 to B+ from B and Moody’s Investors Service upgraded their corporate credit rating in September 2016 to B1 from B3.
However, notwithstanding this recent positivity, JCP’s overall turnaround continues to remains fragile. Therefore, continuity of business growth, while improving profitability would be a key monitorable over the near to medium term.
About the Company:
- C. Penney Company, Inc. (NYSE: JCP), is one of the nation’s largest apparel and home furnishings retailers. Through jcp.com & over 1,000 store locations across the United States and Puerto Rico, JCP is offering a broad assortment of products from a leading portfolio of private, exclusive and national brands. Supporting this value proposition is the spirit of over 100,000 JCPenney associates worldwide, who are focused on the Company’s three strategic priorities of strengthening private brands, becoming a world-class omnichannel retailer and increasing revenue per customer.
Company’s verticals:
Recent update:
Optimization of retail stores: In order to adjust business to effectively compete against the growing threat of online retailers, the company released the list of 138 stores and the one Florida supply chain it will be closing.
As a result of the store actions, JCP will also close a distribution center located in Lakeland, Fla. in early June 17. The Company also is in the process of selling its supply chain facility in Buena Park, Calif. in an effort to monetize a lucrative real estate asset.
Rationale: JCP has been quite aggressive to better align its retail operations for sustainable growth. The company believes that the relevance of brick and mortar portfolio will be driven by the implementation of these initiatives consistently to a larger percent of its stores. Therefore, the decision to close stores will allow them to raise the overall brand standard of the Company and allocate capital more efficiently. Moreover, closing stores will also allow them to adjust their business to effectively compete against the growing threat of online retailers.
Financial Impact: The total store closures represent approximately 13 – 14 % of the Company’s current store portfolio, less than 5% of total annual sales, less than 2% of EBITDA and 0% of net income. The stores identified for closure either require significant capital to achieve the Company’s new brand standard or are minimally cash flow positive today relative to the Company’s overall consolidated average.
The annual cost savings resulting from these strategic decisions, primarily occupancy, payroll, home office support, corporate administration and other store-related expenses, are estimated at approximately $200 million. During the first half of 2017, the Company expects to record an estimated pre-tax charge of approximately $225 million, primarily lease termination obligation expenses, non-cash asset impairments and transition costs, in connection with this initiative.
Expansion in Home services business:
JCPenney Home Services is planning to test six programs in select markets to establish its relevance and appeal among shoppers. These programs will provide turn-key services for heating and cooling systems, bathroom remodeling, quick ship and installed blinds, whole home water solutions and awnings, as well as easy-to-install smart home devices.
As per management, these are categories that JCPenney offered in its assortment many years ago, and they believe the timing is right to re-enter home services business in order to acquire available market share and differentiate its business from traditional competitors and pure e-commerce retailers.
Each program will be presented as an informative, compact display located within the home department in approximately 100 stores this spring, with services and marketing varying by location. The Company has also launched a digital storefront at jcpenneyhomeservices.com, where users can shop the range of professional services offered and schedule an in-home consultation. An authorized contractor will then determine the scope of the job and provide an estimate for the total cost. JCPenney will introduce a JCPenney Home Services credit card this summer, enabling customers to take advantage of attractive promotional financing offers.
Risk Factors & Key Stock Influences:
JCP operates in a highly competitive industry, which continues to impact its sales and profitability. JCP’s business growth and yields are directly constrained by the competitive landscape into which it operates. Therefore, outcome of the recent business strategies implemented by the company would be a key monitorable over the medium term.
JCP’s present capital structure is very aggressive. This level of indebtedness may adversely affect its business and results of operations and may require the use of available cash resources to meet repayment obligations, which could reduce the cash available for other purposes.
As of January 28, 2017, it had $4.836 billion in total indebtedness. In fact, this level of indebtedness may limit its ability to obtain additional financing, if needed, to fund additional projects, working capital requirements, capital expenditures, debt service, and other general corporate or other obligations, as well as increase the risks to its business associated with general adverse economic and industry conditions.
The company has announced several positive developments in the recent past & should the company come out with better than expected guidance or experience another positive development, the stock could react positively.
Earnings Review:
JCPenney reported net sales of $4.0 billion in fourth quarter of 2016 and 2015. Comparable store sales were (0.7) % for the quarter.
Home, Sephora, Salon and Fine Jewelry were its top performing merchandise divisions during the quarter. Geographically, the Southeast and Pacific were the best performing regions of the country.
Profitability:
For fourth quarter, gross margin was 33.1 % of sales, a 100 basis point decline compared to the same period last year. Gross margin was impacted primarily by increased promotional activity during the quarter, coupled with the continued growth in both online and major appliances.
For the fourth quarter, the Company delivered a $323 million improvement in net income over the prior year to $192 million or $0.61 per share.
EBITDA improved $288 million to $427 million for the quarter, including the $62 million gain on the home office sale, a 207 % improvement from the same period last year. Adjusted EBITDA for the quarter improved $68 million or 18 % to $449 million.
Cash Flow & Balance Sheet:
JCP ended year with $887 million of cash and cash equivalents, a decrease of $13 million from the prior year.
Its primary sources of liquidity are cash generated from operations, available cash and cash equivalents and access to bank borrowings. JCP’s cash flows may be impacted by many factors including economic environment, consumer confidence, competitive conditions in the retail industry and the success of its strategies.
For 2017, the management believes that its existing liquidity will be adequate to fund capital expenditures and incremental working capital needs; however, in accordance with their long-term financing strategy, they may access the capital markets opportunistically.
Outlook over the near term:
The Company’s 2017 full year guidance, which includes the expected impact of store closures, is as follows:
Stock Performance:
On Monday, April 3rd, 2017, JCP shares were trading at $6.09 i.e. -1.22% lower, on an average volume of 19.83M shares exchanging hands. Market capitalization is $1.88 billion. The current RSI is 55.7
In the past 52 weeks, shares of JCP have traded as low as $5.45 and as high as $11.30.
At $6.09, shares of JCP are trading below its 50-day moving (MA) of $6.45 and below its 200-day MA at $8.41
The present support and resistance levels for the stock are at $6.01 & $6.33 respectively.
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