Has J.C. Penney Risen From the Dead?

Middle market retailer J.C. Penney (JCP, headquartered in Plano, TX, has posted three consecutive quarters of year-over-year, same-store sales growth, which came on the heels of a well-publicized failed attempt to turn around its image and years of declining sales. Does this recent success mean all is now well for the iconic retailer?

Faced with the prospect of declining sales since 2006, the company fired long-time CEO Mike Ullman and hired former Apple executive Ron Johnson in November of 2011. Johnson was the brain behind the now ubiquitous Apple stores, and was given $52 million in compensation to leave Apple and lead JCP’s turnaround efforts. He announced his turnaround vision in January of 2012, which centered on doing away with coupons, sales and promotions in favor of offering “fair and square” prices to customers everyday. The stock traded near $43 per share at that time, and there was great optimism that the genius behind Apple’s retail success would bring similar success to J.C. Penney.

What followed was one of the most high-profile failures in retail history. The company reported a staggering $1.3 billion operating loss in 2012 on $12.9 billion in revenue, compared to a break even year in 2011 on $17.2 billion in revenue. The new strategy alienated a large part of JCP’s existing customer base, and many customers took their business elsewhere.

In April 2013 Johnson was fired, and Ullman was brought back as interim CEO. JCP shares traded at a mere $16 per share at that time, losing almost 2/3rds of their value under Johnson’s watch. Sales continued to fall, and the company posted a $1.4 billion operating loss in 2013 on $11.8 billion in revenue. Short on cash, JCP diluted existing shareholders by completing a secondary stock offering in September of 2013 and sending the share price down to near $6 per share. Shares eventually traded for under $5 per share in early 2014.

The company got back to basics after Ullman returned, and it saw surprisingly strong sales during the 2013 holiday season. The past two quarters have shown further improvements in sales, gross profit margin and reduced operating losses. The company posted an operating loss of $70 million during its most recent quarter, which sounds bad until one considers the fact that it was losing a whopping $400 million – $700 million per quarter throughout most of 2013. The stock has traded above $10 for most of the past 2-3 months.

Though the company has done well to stabilize its situation, huge challenges remain. It has to continue to win back customers, increase profit margins and increase sales, which are still roughly 30% below pre-Ron Johnson levels. It also desperately needs to get back to a point where it starts generating positive free-cash flow…something it has not done since 2011. By no means is J.C. Penney a sure thing at this point despite its recent success, but a strong holiday sales season could mean another leg up for its share price and another vote of confidence for company management and investors.

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