There's certainly no shortage of news coming from the J.C. Penney (NYS: JCP) camp lately. The long-awaited investor's day, Sept. 19, hosted by CEO Ron Johnson, added fuel to what was already a decent-sized flame. How topsy-turvy is the action surrounding the former king of the retail industry?
A few notable examples: An analyst lowers his rating on J.C. Penney citing concern with the transition strategy and effectiveness; on the same day another raises it -- for the same reason. Investors listen with bated breath as the CEO shares his vision, initiating a spike of 12% in share price -- followed by a nearly identical drop the following trading day. Not to be outdone, options traders are running amok, with nearly three times as many betting on a decline in the recent share price.
The gist of the arguments -- for and against
If you don't follow J.C. Penney closely, you may be surprised to learn shareholders have enjoyed a stellar two-month run. Since the stock bottomed out at $19.25 a share on July 17, it's up about 37% -- and that's taking the drop on Sept. 20 into account. Not bad.
Supporters of a successful turnaround hang their hats on a few things.
There are a number of analysts and J.C. Penney insiders in Johnson's corner as he attempts to rebuild it from the ground up. Within the past two weeks, analysts from Oppenheimer and JPMorgan Chase have reiterated their respective versions of a "strong buy" rating. Oppenheimer analyst Brian Nagel's opinion is indicative of how disparate the views on the company are. His take on why all those selling J.C. Penney short are wrong goes something like this: The poor results to date are indications of how aggressive the changes at the company have been.
Hedge fund manager Bill Ackman -- an owner of nearly 18% of J.C. Penney's outstanding shares -- continues to exude confidence in Johnson's vision. With nearly $18 billion under management, Ackman's a pro and has to know what he's doing, right? Of course, with so much at stake, it's not unseemly to suggest Ackman may have an inherent bias.
Proponents will also point to the success of J.C. Penney's new stores as justification for their bull sentiments. According to Johnson's discussion on Sept. 19, the store-inside-a-store concept, featuring aisles five feet wider than in its traditional stores, are performing at a clip 20% better than J.C. Penney as a whole. The exclusive arrangement with Disney to open up shops within the "new" J.C. Penney announced on Sept. 19 didn't hurt, either.
But the turnaround has as many, if not more, detractors than bulls. As my colleague Rick Munarriz points out, the positive sales results J.C. Penney refers to are skewed, to say the least.
Then there are the analysts negative on the company. Shortly after Oppenheimer and JPMorgan were sharing their feel-good news, Zacks and Piper Jaffray both lowered expectations to $26 and $25 a share, respectively. And you can toss in the aforementioned negative options trading, to boot.
Finally, as all Fools know, no investment decision should be made without a review of the fundamentals. What's intriguing regarding J.C. Penney's numbers -- and the bulls may have an argument here -- is that it's priced like an upstart retail chain just out of the blocks. Surely, you'd get no argument from Johnson, who is the first to acknowledge that's about right.
Thing is, J.C. Penney is trying to execute a turnaround for the ages, not secure real estate, hire thousands of employees, and address the myriad other responsibilities a true retail start-up endures. Though some leeway is acceptable given the timing of the transition, comparing fundamentals is warranted -- and they paint a dire picture.
Macy's (NYS: M) and Nordstrom (NYS: JWN) are what the new J.C. Penney strives to be when it grows up, while Kohl's (NYS: KSS) provides a better comparison based on where J.C. Penney is today. The problem is, on virtually any fundamental basis, J.C. Penney isn't in the same universe as any of them. Macy's and Kohl's generate sales-per-square-foot 30% and nearly 50% higher, respectively, than J.C. Penney.
Gross margins can't compare with either Macy's or Nordstrom's, and all three competitors provide shareholders with a 2% (give or take) dividend yield. Obviously, J.C. Penney isn't in a position to compete on an income basis right now. If positive cash flow does return, it has more than enough costs ahead of it to absorb before paying shareholders.
Since J.C. Penney is all about opinions, here's another: Based on feedback from avid shoppers, the "new" J.C. Penney is working. And you know what? I think Johnson and the team will succeed, too -- eventually. The good news for investors is there's no hurry, one way or the other.
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