Is the worst over for J.C. Penney (NYSE:JCP)? Some investors seem to think so.
Shares of the Plano, Texas-based company surged Wednesday after the 110-year-old retailer reported quarterly results that were not as awful as Wall Street had feared. The company had a net loss of $489 million, or $1.94 per share, wider than the $123 million, or 56 cents, it lost a year earlier. Revenue fell 5.1% to $2.78 billion, an improvement from a year earlier when sales plunged 27%. What caught the eye of investors, however, was the optimistic tone CEO Mike Ullman had regarding the all-important fourth quarter.
Revenue at existing stores, a key retail metric, will rise in the fourth quarter, on both a year-over-year and quarter-to-quarter basis, according to Ullman. Same-store sales rose in October for the first time in more than two years. During the holiday quarter a year ago, comparable sales fell 31.7 percent. Gross margins also are improving. The company's profits were hurt in the past quarter because it had to mark down slow-selling merchandise that former CEO Ron Johnson brought in during his disastrous 17-month tenure. J.C. Penney was able to quell concerns about its liquidity by noting that it had $1.71 billion in cash and cash equivalents including the funds available from its credit facility.
Wall Street, which has pushed J.C. Penney's shares up more than 30% over the past month, was heartened by the news. J.C. Penney surged nearly 7% to $9.31. One investor that isn't benefiting from the run-up is billionaire Bill Ackman. The head of the Third Point hedge fund unloaded his stake in the retailer, which he had held for several years, in August at a loss of about $470 million.
Speaking to analysts on the earnings conference call, Ullman, who was pushed out in favor of Johnson prior to his recent return, didn't appear to be resting on his laurels.
"The work we’ve been doing over the last seven months to stabilize the business financially and operationally required fundamental changes in many aspects of our business, " he said. "It’s hard work with no quick fixes, but our teams are rising to the challenge and our customers tell us they love the progress we’re making."
If investors are game enough to buy J.C. Penney shares, the time to do it is now. Wall Street is starting to take a shine to the stock and shares of the retailer may surge higher as more investors start to believe that Ullman's turnaround is sustainable. Just look at what happed to Best Buy.
Last year, many on Wall Street had given up on Best Buy (NYSE:BBY). The consumer electronics giant made headlines for all the wrong reasons including having to fire its CEO Brian Dunn for having an affair with a female subordinate. Founder Richard Schulze stepped down as board chairman because he didn't notify other members about Dunn's relationship. Schulze briefly considered buying the company, whose financial performance had been dismal, but abandoned the idea. Schulze rejoined the company this year as chairman emeritus Under the leadership of current CEO Hubert Joly, shares of Best Buy have skyrocketed more than 200%. However, Best Buy stumbled in the most recent quarter, posting disappointing earnings. This underscores the notion that corporate turnarounds take time and often don't go smoothly.
Many challenges lie ahead for J.C. Penney. As Bloomberg noted, the company's gross margin of 29.5% lags rivals such as Macy's (NYSE:M) (39.2%) and Kohl's (NYSE:KSS) (32.5%). For the company to remain competitive, that's got to change. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are also competing for the same shopper and will be ferocious competitors with J.C. Penney when it comes to price.
Unfortunately, the macroeconomic environment isn't great for J.C. Penney as consumers, especially those with lower incomes, take a cautious approach to the holidays. Stable gas prices, which are closely correlated with consumer confidence, are preventing merry holidays from turning miserable but they certainly won't be jolly for some retailers. The National Retail Federation is expecting holiday sales to rise 3.9% to $602.1 billion, a projection that many economists think is optimistic.
The Bottom Line
Ullman deserves credit for making progress in undoing the damage done by his predecessor. Ironically, Ullman was shoved aside as CEO to make way for Johnson, whose claim to fame was establishing Apple's (Nasdaq:AAPL) retail stores.
Investors with a high tolerance for risk and an iron stomach should buy J.C. Penney's shares today. There's a chance that the stock could follow Best Buy and "pop" over the next few months. Equally, the retailer could stumble again.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.