Hints of a J.C. Penney Turnaround Fail to Impress Wall Street
Poor J.C. Penney. Just when it seems to be showing signs of a turnaround, it still finds a way to tumble backward.
It's never a good sign when you host an Analyst Day -- inviting Wall Street pros to hear your turnaround strategy -- and the stock takes an 11 percent hit that day. It's probably just as bad for the stock to take a 7 percent hit the next day, after analysts have had a chance to sleep on it.
This is what happened to JCP last week. Shares of the meandering department store chain wound up losing ground every single trading day, closing out the week with a brutal 29 percent loss.
They're Not Called Analysts for Nothing
J.C. Penney's Analyst Day last Wednesday should have given the chain the perfect springboard to rally investors. It tried. It's painting a picture where annual sales can increase by $2.55 billion over the next three years as it builds its online initiatives and refreshes product categories.
However, the only thing that weighed on the market was J.C. Penney warning that September sales had come in weaker than it was expecting earlier this summer. Comparable-store sales for the current quarter would still be positive, but softer than the initial forecast.
That's problematic on Analyst Day. How are you going to convince investors that your retailing vision is strong enough to look all the way out to 2017 when you couldn't even get the current quarter right?
Orange Apron to the Rescue
J.C. Penney is trying to change the narrative back in its favor this week. On Monday morning it announced that Ellison will be its next CEO. He will step in next month as CEO-designee, taking over for interim helmsman and former J.C. Penney CEO Mike Ullman.
At least one Wall Street firm wasn't impressed. Analysts at UBS (UBS) downgraded the stock, slashing its price target in half to $5. It isn't necessarily knocking the Ellison hire, but it feels that the move won't be enough to remedy the structural issues that are holding J.C. Penney back. It doesn't think that the retailer's rosy vision of 2017 is realistic given the department store operator's situation.
Ellison seems like a credible call on paper. Before his dozen years at Home Depot, he spent 15 years at Target (TGT). Yes, the former CEO who nearly ran J.C. Penney into the ground with his radical makeover was also once a Target exec, but that's merely a coincidence. Everyone seems to agree that J.C. Penney's best shot at redemption is to return to its roots as a value-minded chain of apparel basics and other home and clothing essentials, and that's something that Target's been excelling at for ages with its "cheap chic" appeal.
J.C. Penney is starting to get some things right. This is shaping up to be the fourth consecutive quarter of positive year-over-year comps. The losses continue, but at least it has pushed out three straight quarters of smaller-than-expected deficits. Gross profit margins and inventory levels improved in its latest quarter. However, last week's nearly 30 percent stock slide is proof that all of that can go out the window if you disappoint the analyst community during a presentation that's supposed to wow them.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.