The Long And Winding Road: JC Penney's Path To Recovery

Under the leadership of a new management team, J C Penney Company Inc JCP has gained market share, despite a tough macro environment. Jefferies’ Randal J. Konik initiated coverage of the company with a Hold rating and $9 price target. The analyst mentioned that although JC Penney seems to be on a path to recovery, the road appears “winding and long.”

Market Share Gains

The new management team has planned a path towards sales recovery, and the company has been making progress. JC Penney has gained market share against its peers. Konik mentioned that the largest sales growth opportunities in the long term are likely to stem from:

• Revitalizing the center core, including expansion of Sephora shop-in-shops
• Regaining lost volume in the home section
• Ecommerce growth

“While we expect the company to continue to gain share from its peers, the retail environment has been choppy, particularly among department stores,” Konik noted.

Related Link: Retail Earnings Parade Begins: JC Penney, Kohl's In The Spotlight

Margin Recovery

JC Penney’s margins are meaningfully below its historical trends, as well as its peers. The analyst believes the company would be able to achieve EBITDA margins of at least 10 percent going ahead, up from 5.6 percent in FY16.

“We expect the mix shift back towards private label merchandise, a reduction in discounts, supply chain efficiency, cost control, and SG&A leverage to all support margin expansion going forward,” the Jefferies report stated.

While saying JC Penney had made good progress over the past year and has “significant opportunity ahead,” Konik mentioned that a challenging retail environment could hinder its progress.