Jefferies Sees Ample Opportunity For Margin Recovery At JCPenney

At its investor day, JCPenney highlighted four key areas that have potential to drive $1.2 billion–$1.7 billion in incremental sales between FY'18–FY'20, including: value, beauty, special sizes and home refresh.

Value includes emphasizing private brands, and beauty includes accelerating openings of its highly productive Sephora shop-in-shops. Within special sizes, JCPenney looks to capitalize on an underserved $18 billion market, and under home refresh, the company plans to roll out appliances to 500 stores by year-end.

The company noted that appliances have sales productivity 10 times more than the products they are replacing and eight times higher margins.

As such, Jefferies sees ample opportunity for margin recovery, as the company brings margins more closely in line with its peers.

Related Link: Deutsche Bank's Top 10 Takeaways From Buy-Rated JCPenney's Analyst Day

"GM should benefit as JCP grows private brand penetration from 52 percent in FY'16 to 65–70 percent in FY'19–FY'20, as private label margins are ~400–500 bps higher than national brands, and should move even higher as the company implements its strategies to reduce product costs," analyst Randal Konik wrote in a note.

A main theme of the event was "simplification," as the company hopes to become a more nimble, streamlined organization. The analyst said the company is on track to have nearly the entire United States receive product in two days by next year.

On the financials, the company reaffirmed its FY'17 EBITDA guidance of $1 billion and its FY'18 target of $1.2 billion. The company also set targets for FY'20 including SSS of 3 percent annually, GM expected to increase 75–100 bps and EPS of $1.40–$1.55.

"This would mark a significant recovery, as JCP is on track to be EPS positive this year for the first time since FY'12, and has not earned over $1 since FY'12. The liquidity position should also continue to improve, with the company targeting net debt/EBITDA of <2x by FY'20," Konik noted.

At time of writing, shares of JCPenney were down 4.37 percent at $10.28.

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