Consumers Still Pinching Penneys

By Ryan C. Fuhrmann | February 24, 2009 AAA

Inventory and operating expense reductions allowed retailer J.C. Penney (NYSE:JCP) to beat analyst expectations by a few "penneys" when it reported fourth-quarter results on Friday. This good news sent the stock up while another dreadful day dragged the market down, but does Penney's rise indicate that it's finally on the path to brighter days ahead? Let's dig in a bit deeper.

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Results
Fourth-quarter sales fell a dreadful 9.8% to $5.8 billion as strong results in women's apparel and family shoes wasn't near enough to offset the woeful 10.8% decline in same-store sales. Top-line results are only expected to deteriorate for the coming quarter as management is calling for a total sales decline of 10%-13% as comps will fall somewhere between 12% to 15%. Total fiscal-year sales ended up falling 6.9% to $18.5 billion on an 8.5% fall in comps.

Operating expenses were held in check and fell 0.1% for the year, but lower sales exacerbated the drop in operating income, which fell 40% to $1.14 billion while higher interest expense helped pushed net income down 48.5% to $572 million, or $2.57 per diluted share. On a trailing basis the P/E multiple appears extremely low, but analysts only expect $0.07 in earnings per share for the coming year, which management projects will start with a first-quarter loss of $0.20 to $0.30. (Learn how to evaluate stocks quickly with our Investment Valuation Ratio Tutorial.)

Bottom Line
Full-year operating cash flow held up much better than what occurred on the P&L statement, falling 8% to $1.2 billion. However, capex ate up most of the capital generated by Penney's store operations and this barely left enough to cover the annual dividend of $0.80, which is currently checking in at a yield of around 5.4%. Clearly, given the current earnings guidance the firm will not be enough to cover the payment for the coming year. This leaves little investment appeal for investors interested in earnings or income potential, but the shares look cheap on a enterprise value-to-sales basis, trading at 0.2-times sales versus the industry average of 0.5-times. Looking at specific rivals, Sears (Nasdaq:SHLD) and Dillard's (NYSE:DDS) are trading at only 0.2-times sales, while upscale chains Saks (NYSE:SKS) is the same at 0.3-times and Nordstrom (NYSE:JWN) trading a more lofty 0.6-times. Even embattled Macy's (NYSE:M) is at 0.5-times.

Final Word
A tough environment has adversely affected the entire apparel spectrum, be it higher-end goods or middle-of-the road providers. For January, upscale Nordstrom and Saks posted negative double-digit comps for January - as did Penney - while Macy's posted a more modest mid-single drop. What it demonstrates is that retailers are mostly in the same boat these days and are seeing sales suffer as consumers pinch pennies to focus on the core necessities of paying bills, buying food and fulfilling basic needs (like clothing). As for Penney in particular, though its valuation appears compelling and it looks able to ride out any further industry turbulence, there isn't really anything that makes it stand out from the crowd right now.

Keep reading on this subject, in Analyzing Retail Stocks.

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