J.C. Penney Doubling Down On Its Core

While Argus’ Christopher Graja believes there has been potential for upside in J C Penney Company Inc JCP shares, the analyst noted the company has significant work ahead of it, especially associated with driving sales growth during a time when there would be flat to negative mall traffic.

Graja maintains a Hold rating on the company.

Q3 Results

J.C. Penny reported its Q3 results, with the operating margin in line with the expectations, although total and comparable sales missed the consensus.

The adjusted non-GAAP loss came in at $0.21, in line with the consensus but missing the estimate.

“On a GAAP basis, the company lost $0.22 per share, narrower than the loss of $0.38 per share a year earlier,” the analyst mentioned, while noting that comparable sales declined 0.8 percent.

How To Win Over Investors

Following the succession of Marvin Ellison as the CEO of the company, Ellison has taken “difficult but necessary steps to improve liquidity, re-engage core customers, restore private brands and re-assure the vendor community that Penney’s would pay its bills,” Graja pointed out.

The analyst believes the hiring of Ellison and choosing him to be Mike Ullman’s successor as CEO has been providing reassurance to vendors and lenders.

However, the only way to earn investor confidence, Graja stated, was to generate consistent free cash flow growth and to alleviate concerns regarding J.C. Penny’s financial strength and need for external financing.

“We believe that JCP took visible steps in that direction in FY15 by substantially improving its gross margin, generating positive free cash flow after a $2.8 billion loss in FY14, and building liquidity of $2.1 billion, including cash and availability under the credit facility,” the analyst went on to say.

In FY 2016, the company generated free cash flow of $131 million and expects to improve this further in FY 2017.