J.C. Penney Shares Rally As New York Post Sees August Turnaround (JCP)
Shares of embattled retailer J.C. Penney (NYSE: JCP) rallied sharply late Wednesday and into early trade Thursday following a New York Post report (see tweet below) that August same store sales were tracking higher than forecast.
They claim that J.C. Penney was benefiting nicely from back to school sales.
J.C. Penney shares rallied following a tweet from Post reporter James Covert. He tweeted:
— James Covert (@jamescovert1) August 14, 2013
Shares popped 40 cents on the news from $13.00 to $13.40 and traded to an overnight high of $13.73 on the news. However, J.C. Penney shares are a long way from their 52-week high of $32.55.
Penney shares have been volatile this week following the very public boardroom battle which saw Pershing Square's Bill Ackman leave the board. He owns 17.7 percent of the company and will most likely look to sell his stake at a large loss once his lock-up period expires.
Analysts have highlighted that CEO Mike Ullman has done a good job of improving the inventory management as sales have crumbled and has also reinstated marketing policies that were canceled under former CEO Ron Johnson. Ullman has gone back to having sales as a key way to increase foot traffic, a policy which was canceled under Johnson.
5 to 10 Percent Improvement
The Post cites J.C. Penney insiders who said that traffic in stores was up 5-10 percent in August as parents have begun to shop for back-to-school clothing. They also note the recent television ads and promotional events as drivers of the increase in traffic.
However, the article does highlight a pressing matter for the company as J.C. Penney has been burning lots of cash and may be cash deficient next year. Also, the company is heavily indebted and has been borrowing more to fund operations, increasing the amount of cash it spends on interest expense.
What Do They Do Now?
Earlier this year, Benzinga laid out six options for the company's future. Options discussed were:
- Cost-cutting, which can only go so far. However, with sales depleting, cost-cutting is only an option to prevent bankruptcy, not turn around.
- REIT Spin-Off: in this scenario, the company could spin off some key retail properties into a REIT for cash and then pay rent on to the REIT. However, Belus Capital Advisors' Brian Sozzi told Benzinga that J.C. Penney does not have many valuable locations and thus this may not get the company very far.
- Leveraged or Management Buyout: this option was interesting before the news that Ackman has left the board, because he owned 17.7 percent and the top six shareholders, including George Soros and Vornado (NYSE: VNO), combined own nearly 55 percent of the company. However, with Ackman now looking to sell his stake and with the company already loaded with debt, this seems unlikely.
- Restructuring: J.C. Penney could look to restructure some of its debt to get out its troubles but like cost-cutting, this can only get the company so far. The decline in sales needs to be reversed for either of these options to help.
- Bankruptcy: this speaks for itself.
J.C. Penney shares rose 1.14 percent pre-market to $13.26 per share.
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Author disclosure: I have no position in any of the above mentioned securities.
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|May 2016||Morgan Stanley||Maintains||Underweight|
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