J. C. Penney Company Inc. (JCP), a leading retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, is trying every means to tide over a distressed economy. A close look at its attempts convinces us about our recommendation on the stock that is currently at Neutral.
The Company Counts Upon
J. C. Penney’s well diversified supplier base, compelling private and national brands, marketing campaigns, point-of-sale technology initiatives as well as effective cost and inventory management should drive sales and margin trends over the long-term. The company is leaving no stone unturned to become cost resilient, and focusing on closing underperforming stores and exiting its catalog business.
The company in order to enhance the customer shopping experience has been focusing on remodeling, renovating and refurbishing of stores as well as refreshing its website functionality due to continued migration to online shopping. We believe that the launch of compelling new merchandise and the JCP Rewards program should augur well for J. C. Penney.
The in-store Sephora departments continue to outperform in drawing younger and more affluent customers. The company opened 22 Sephora stores during second-quarter 2011, bringing the total count to 276. The Sephora concept inspires confidence and is expected to be a significant revenue driver.
Intriguing Brands
In order to drive sales and improve traffic, J. C. Penney added ‘Liz Claiborne’, ‘MNG by Mango’, ‘Arizona’, ‘St. John's Bay’, ‘Modern Bride’ and ‘Call it Spring’ brands to its portfolio.
Recently, J. C. Penney entered into an asset buyout agreement with Liz Claiborne Inc. (LIZ). Per the deal, J. C. Penney will acquire the global rights for the Liz Claiborne portfolio of brands and the U.S. and Puerto Rico rights for Monet, a fashion jewelry brand, for $267.5 million.
Liz Claiborne brands have a mass appeal, and J. C. Penney’s inclusion of these brands to its portfolio has helped it augment sales and improve traffic. These brands have persistently exceeded the company’s expectations and we believe that their acquisition will definitely pave the way for continued growth and innovation.
Dismal Sales Shattered Hopes
J. C. Penney’s comparable-store sales for September inched down 0.6% compared with an increase of 5.1% for the same month last year. Total sales also fell 3.6% to $1,426 million from $1,480 million in September last year.
Failing to impress with its performance, management now expects the company to deliver third-quarter 2011 loss per share in the range of 12 cents to 7 cents, including restructuring charges of approximately 22 cents a share. However, excluding restructuring charges, the company expects earnings in the range of 10 cents to 15 cents per share.
Earlier, management forecasted third-quarter 2011 earnings between 15 cents and 20 cents a share, including restructuring charges of about 5 cents.
The company also trimmed its comparable store sales guidance, and now expects it to remain flat compared with the year ago quarter. Earlier, J. C. Penney forecasted comparable store sales to increase between 2% and 3%.
Challenging Economy Tough Competition
The economy still remains tough. The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, sluggishness in the housing market, and high unemployment and household debt levels, which may affect their spending.
Competition remains intense. J. C. Penneyfaces stiff competition from Macy’s Inc. (M) and Kohl’s Corporation (KSS) on attributes, such as merchandise assortment, price, quality, location, and credit facility. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins.
Based on the pulse of the economy, we believe that consumers will remain watchful on their spending in the upcoming holiday season, and thereby we could see more competitive pricing and new products to attract shoppers. We believe that retailing companies will move heaven and earth to win the hearts of bargain hunters and it definitely remains a wait-and-watch story as to who emerges successful in wooing consumers in this waning economy.
Zacks Rank Defining Truncated Guidance
Given the pros and cons we maintain our long-term ‘Neutral’ recommendation on the stock. However, J. C. Penneyholds a Zacks #4 Rank that translates into a short-term ‘Sell’ rating and defines the company’s lowered outlook.
PENNEY (JC) INC (JCP): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
LIZ CLAIBORNE (LIZ): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
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