JCPenney operates 1,104 stores, selling apparel, accessories, and home furnishings that are moderately priced and targeted to middle-income customers shopping for families and homes. Maintain Neutral rating. JCP posted a Q2 miss on a sales and gross margin shortfall. Continued weak fundamentals and ongoing efforts to reverse prior management’s “failed” strategies suggest a prolonged turnaround as fixing operations and winning back consumers (the most critical, and uncertain, factor) take time. Liquidity appears adequate for now – but the potential need additional funds down the road makes the value case difficult. We advise investors to remain on the sidelines, pending further progress on turnaround initiatives. ■ Weak quarter. Q2 adjusted loss per share of $1.17 missed consensus of ($1.06). Adjusted results exclude losses on: the deferred tax valuation allowance ($0.99), extinguishment of debt ($0.52), restructuring charges ($0.21), non-cash qualified pension expense ($0.04), as well as a $0.28 gain on an asset sale. Operationally, sales and gross profit (-705bp, adjusted) fell short and operating expenses were roughly in line. - Comp -11.9% (vs. -21.7%), below consensus of -8.3% and our -6.0% estimate, hindered by lingering impact from "failed" merchandising and promotional strategies, as well as a disappointing home department renovation (~240bp impact; productivity actually declined in updated stores vs. non-updated). Traffic declined 5.5%, in line with Q1 levels. ■ Signs of improvement… Management indicated comps improved sequentially each month in Q2 (driven by conversion, rather than traffic), as the company has reinstated promotions and key private labels. It anticipates a similar trend for 2H. In Q2, jcp.com sales declined 2% to $215 million and posted a 14% increase in July. The release also noted that initial back-to-school results have been encouraging. ■ …but hangover effects lingering longer. Management indicated traffic remains “challenged” in August due to cycling free kids haircuts and heavy clearance. The company is “restaging” its home department ahead of the holidays, a move that feels more like short-term treatment than a long-term fix. JCP also does not expect to have private label adequately rebalanced or see much gross margin improvement until Q4. ■ Outlook: We see several reasons why JCP’s situation should improve from here (easier comps, prudent pricing/promotion, and product/merchandising corrections). However, Q2 results demonstrated progress will take time. Meanwhile, additional liquidity buys time but further dilutes equity holders. We advise investors to remain on the sidelines, pending further progress on nascent turnaround initiatives and signs of consumer acceptance. August 20, 2013 Baird Equity Research Softline & Department Store Retail J.C. Penney Company, Inc. (JCP) Q2 Recap: Tough Road to Recovery; Some Encouraging Signs Ahead Mark R. Altschwager, CFA [email protected]414.765.3572 Blair M. Pircon [email protected]312.609.5449 Jacob R. Zitter [email protected]312.609.4496 [ Please refer to Appendix - Important Disclosures and Analyst Certification ] LOWERING PRICE TARGET 1-Year Price Chart S-12 O-12 N-12 D-12 J-13 F-13 M-13 A-13 M-13 J-13 J-13 A-13 35 30 25 20 15 10 13 29 Stock Data Rating: Neutral Suitability: Higher Risk Price Target/Previous: $16/$19 Price (8/20/13): $14.01 Market Cap (mil): $3,091 Shares Out (mil): 220.6 Average Daily Vol (mil): 11.94 Dividend Yield: 0.0% Estimates FY Jan 2012A 2013E 2014E Q1 (0.25) A (1.31) A (1.42) E Q2 (0.37) A (1.17) E (1.22) E Q3 (0.93) A (2.00) E (1.31) E Q4 (1.70) A (1.72) E (0.77) E Fiscal EPS (3.24) A (6.20) E (4.75) E Previous (FY) (2.69) E (1.41) E Fiscal P/E NM NM NM Chart/Table Sources: Bloomberg and Baird Data EPS (Net): Adjusted EPS excludes charges and non-cash qualified pension expense
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JCPenney operates 1,104 stores, selling apparel, accessories, and home
furnishings that are moderately priced and targeted to middle-income
customers shopping for families and homes.
Maintain Neutral rating. JCP posted a Q2 miss on a sales and gross margin
shortfall. Continued weak fundamentals and ongoing efforts to reverse prior
management’s “failed” strategies suggest a prolonged turnaround as fixing
operations and winning back consumers (the most critical, and uncertain, factor)
take time. Liquidity appears adequate for now – but the potential need additional
funds down the road makes the value case difficult. We advise investors to remain
on the sidelines, pending further progress on turnaround initiatives.
■ Weak quarter. Q2 adjusted loss per share of $1.17 missed consensus of
($1.06). Adjusted results exclude losses on: the deferred tax valuation allowance
($0.99), extinguishment of debt ($0.52), restructuring charges ($0.21), non-cash
qualified pension expense ($0.04), as well as a $0.28 gain on an asset sale.
Operationally, sales and gross profit (-705bp, adjusted) fell short and operating
expenses were roughly in line.
- Comp -11.9% (vs. -21.7%), below consensus of -8.3% and our -6.0% estimate,
hindered by lingering impact from "failed" merchandising and promotional
strategies, as well as a disappointing home department renovation (~240bp
impact; productivity actually declined in updated stores vs. non-updated).
Traffic declined 5.5%, in line with Q1 levels.
■ Signs of improvement… Management indicated comps improved sequentially
each month in Q2 (driven by conversion, rather than traffic), as the company has
reinstated promotions and key private labels. It anticipates a similar trend for 2H.
In Q2, jcp.com sales declined 2% to $215 million and posted a 14% increase in
July. The release also noted that initial back-to-school results have been
Sales for Q4-03 and 2003 include an extra week in the retail calendar; excluding sales in the 53rd week, total net sales decreased 0.7% in 2003 and increased 4.7% in 2004
Sales for Q4-06 and 2006 include an extra week in the retail calendar; excluding sales in the 53rd week, total net sales increased 4.6% in 2006 and 1.1% in 2007
Please refer to "Appendix - Important Disclosures" and Analyst Certification
8/20/2013
9Robert W. Baird & Co.
Page 2
Date Printed: 8/12/2011 J.C. Penney Company, Inc. Mark R. Altschwager, CFA, 414-765-3572
Fiscal Year: January (JCP - NYSE) Blair M. Pircon, 312-609-5449
In Q4-08, SG&A expenses were reclassified for pension expenses (applied retroactively through F2004)
Total Pension
Expense/(Income)
Pension Exp (Inc)
8/20/2013
Selling General
& Administrative
Interest
Expense (Income)
11Robert W. Baird & Co.
Appendix - Important Disclosures and Analyst Certification
Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q38
16
24
32
40
48
2011 2012 2013
11/04/10N:$30
12/02/10N:$32
01/24/11N:$33
02/25/11N:$34
04/07/11N:$35
05/16/11N:$38
07/07/11N:$36
08/12/11N:$32
09/01/11N:$31
01/05/12N:$29
01/27/12N:$39
02/27/12N:$43
04/12/12N:$37
05/15/12N:$34
05/16/12N:$32
06/19/12N:$28
07/27/12N:$24
08/13/12N:$25
09/20/12N:$31
11/12/12N:$23
02/25/13N:$22
02/28/13N:$20
04/09/13N:$17
05/08/13N:$18
05/17/13N:$19
Rating and Price Target History for: J.C. Penney Company, Inc. (JCP) as of 08-19-2013
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