JP Morgan: J.C. Penney Stands At 'Pivotal Crossroads'; Now A Good Time To Buy Shares
J.C. Penney's (NYSE: JCP) turn-around story continues to gain momentum as analysts at JP Morgan on Monday released a positive note suggesting shares should be considered as a “fall fever long trade.”
“The J.C Penney story stands at a pivotal crossroads with today's mid-single-digit top-line pace of recovery questioned versus the 33 percent revenue drop the past three years,” Matthew Ross of JPMorgan wrote in a note to clients on Monday.
Ross continued, “While we were encouraged by the second quarter's top-line/gross margin algorithm [6 percent same-store sales gain and 650 basis point improvement to gross margins], J.C. Penney's promotional cadence has returned to fiscal 2011 levels with heightened smaller market competition (particularly with a localized/Omni-Channel Macy's fleet) increasing the likelihood for structural optionality over the next 12 months in our view.”
According to Ross, J.C. Penney operates with components of its expense base commensurate to its fiscal 2006 $20 billion revenue base, presenting a “material leverage constraint.” Additionally, SG&A expenses are currently at a sales base below $15 billion.
Ross Further Crunches Up The Numbers And Concludes:
"Herein, we layout an EBITDA accretive restructuring road-map using J.C. Penney's 33 store closings in fiscal 2014 as a base ($65 million of cost savings) with our pro-forma analysis pointing to an EBITDA dropdown of ~$1.5 million per store (ex one-time closing costs) resulting in a more productive, margin accretive, and free cash flow positive aggregate store fleet into fiscal 2015."
Bottom Line, According To Ross:
“Net/net, with new management, a new potential analyst day catalyst and store base consolidation likely post year-end (every 100 store closing = $150 million EBITDA or $3 Equity Value) answering the “tougher compares” fiscal 2015 bear case argument, Neutral-rated J.C. Penney sets up well for a long trade through year-end, in our view.”
Looking forward to fiscal 2016, Ross is projecting J.C. Penney's "base case scenario" will be comprised of $13.6 billion in sales, 37.5 percent gross margin and an SG&A 34.3 percent of sales.
A level of SG&A being below 30 percent of sales is not feasible with revenues under $15 billion given the company's advertising, occupancy/rent and payroll structurally at 2011 levels today. The analyst noted that J.C. Penney's is not expected to reach the $15 billion mark until fiscal 2018 based on Monday's mid-single-digit growth pace.
Ross notes that a large scale restructuring of at least 100 store closures is “likely” post-year end with a possibility of returning to 2006 peak levels of 39.3 percent gross margin, an SG&A being 29.6 percent of sales and upside case of 10 percent EBIT margins given $1 billion in permanent expense reductions.
Latest Ratings for JCP
|Dec 2016||Bank of America||Upgrades||Neutral||Buy|
|Sep 2016||Guggenheim||Initiates Coverage on||Neutral|
|Aug 2016||Morgan Stanley||Maintains||Underweight|
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