JC Penney Hits 30-Year Low; JPMorgan Sees Long-Term Viability Trumping Short-Term Share Price

There was good news and bad news for JC Penney (JCP) investors in JPMorgan’s report on the beleaguered retailer today.

REUTERS

The good news is that management is making the tough decisions necessary to ensure that the JC Penney can turn itself around. The bad news is that a turnaround will take time–lots of time.

Analysts Matthew Boss, Anne McCormick and Esteban Gomez explain:

We left Dallas incrementally positive in management's decision making process, noting a clear mindset shift toward long-term viability…rather than near-term stock price….Re-focused on the core ("don’t try to be something you are not" mantra), management is working to correct missteps of the past (private label reorganization, Home realignment, shops structure). Looking ahead, the top-line ($4B recapture: $2B = home, .com, private brands / $2B = lost customer base) and gross margin (return to 38-39% = 450bps: return to 15% clearance mix + 350bps: private brands to 50%) algorithms remain the carrot on paper, but we left HQ without a clear sense of timing around a top-line inflection (customer connection impaired with traffic driving Home a work in progress), which remains key to the turnaround.

While JC Penney’s recent stock offering helped with liquidity, it could still be an issue, Boss, McCormick and Gomez say. They write:

While management believes current liquidity remained adequate though year-end, the $810M equity raise (9/27) provides a backbone for appropriate longer term decisions with guidance for total liquidity of $2.0B+ at year-end (ex greenshoe). Specifically, initial internal planning discussions around holiday 2014 were being impacted by short-term liquidity concerns (impacting buys / staffing decisions), with the equity injection providing flexibility through 2H15 if fundamentals do not inflect next year. That said, the treasure chest is far from infinite with management speaking to potential restructuring in 1H14 (if needed and not in the planning process today) to include the closing of cash flow negative stores (while four-wall profitable today) as an option…

Shares of JC Penney have dropped 8.1% to $7.23 at 12:07 p.m. today, the lowest price since 1982. Macy's (M) is little changed at $42.57, Sears (SHLD) has gained d0.9% to $55.23, Kohl’s (KSS) has ticked down 0.1% to $51.43.