Selling a Turnaround Tale at Penney
Modest Progress at Strugglng Retailer Could Still Amount to Good Value
Customers at J.C. Penney’s first store in Brooklyn, N.Y., in August. Third-quarter results are expected to mark a small step for the retailer toward regaining lost ground. GETTY IMAGES
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As analyst meetings go, two held by J.C. Penney Co. were mirror images of one another. The troubled retailer had better hope their aftermaths turn out that way, too.
Last month, the company unsuccessfully touted its turnaround to Wall Street. Penney’s stock dropped by 17% the following two trading sessions. Even the hiring days later of a retail veteranfrom Home Depot Inc. to be CEO didn’t help—the stock is lower today.
Contrast that to the January 2012 debut of Ron Johnson , the rock star retail executive poached from Apple Inc., as Penney’s chief executive. The stock surged by 21% over the course of that two-day analyst meeting. But Penney’s shares lost 90% of their value over the next two years as sales fell by a third, or nearly $6 billion, from fiscal 2011 through fiscal 2014. Mr. Johnson left Penney in April 2013.
Penney’s fiscal third-quarter results Wednesday won’t show great strides in regaining all that lost revenue and value. But they should represent a small, hopeful step. Analysts see the retailer losing 85 cents a share for the period ended in October, compared with a loss of $1.94 a year earlier.
Forecasts were cut sharply after the company warned in October of slower revenue growth. Penney hasn’t earned a profit in a quarter since the one that ended that fateful January when Mr. Johnson outlined his vision. Analysts think it can eke one out in the current quarter, the crucial holiday period ending in January 2015.
As for Penney’s financial goals, Wall Street is skeptical: Consensus forecasts for the next two years fall short of management targets.
Then again, investors don’t have to swallow management’s story. They can go ahead and assume that Penney will be a middling retailer, making only modest progress in getting back market share lost to competitors under Mr. Johnson.
The stock doesn’t even get credit for that. Adjusting for its significant borrowings, Penney is valued at just over half the multiple to sales of its closest competitors, on average. That comparison excludes far-more-troubled Sears Holdings Corp. , which fetches half of Penney’s multiple. Sears’s woes and similar customer base may help its rival’s recovery.
Neither the nicest nor the cheapest shop at the mall, this stock may still be worth a pretty penny.
