Imperial Capital Sees J C Penny Turnaround And Intense Competition

Imperial Capital commented on J.C. Penny Company, Inc. JCP Wednesday and maintained an Underperform rating and $3 price target.

Analyst Mary Ross Gilbert saw a turnaround gaining traction in FY 2015 but also saw the retail climate as “intensely competitive.”

The valuation was based on a revised EBITDA estimate for FY16 (the year ending 1/29/17) of $680mn (down from $895mn) and an EBITDA valuation multiple of 8.5x (up from 6.5x).

The multiples are “well above Dillard’s (DDS) 6.6x and Macy’s (M) 6.8x. JCP’s shares traded at an average EBITDA valuation multiple of 6.5x for the 10-year period ended 1/29/11 (prior to CEO Ron Johnson’s brief tenure).

“We still think our valuation may be high; we think JCP shares should trade at a discount to Macy’s and Dillard’s because: 1) JCP is significantly more leveraged (6.5x in FY16 vs. 1.5x for Macy’s and 0.7x for Dillard’s); 2) its anticipated EBITDA margin is much lower (5.6 percent vs. nearly 14 percent and 12 percent for Macy’s and Dillard’s); and 3) it owns significantly less real estate (26 percent of its stores are owned in fee compared to 55 percent and 83 percent for Macy’s and Dillard’s respectively), which may partially explain its lower margin.

“Furthermore, our FY16 EBITDA estimate assumes JCP’s financial performance improves markedly, which may not transpire to the extent we estimate; thus, the significant optionality in the stock price,” according to Gilbert.

J.C. Penny Company, Inc. recently traded at $7.26, down 0.82 percent.