J.C. Penney Company, Inc. (JCP) Earnings: Are Brand Loyalty and Coupons Enough?

On its Q2 2013 earnings call yesterday, the J.C. Penney Company, Inc. (NYSE:JCP) executive team emphasized the importance of rebuilding brand loyalty and bringing back its core group of customers with frequent store promotions and sales. Mike Ullman, CEO expressed the hope that things would improve for the company, stating  that according to a Wall Street Journal study “we had the second best Back to School online business behind Walmart (see our recent WMT earnings analysis published last week) that tells us we’re back in the game and we expect to be in the game all the way through the rest of the year.” Like other retailers J.C. Penney Company, Inc. (NYSE:JCP) is struggling with declining traffic in addition to operational issues; earlier this year the retailer fired its new CEO and also suffered from a credit squeeze issue. Today the company stock had dropped over 4% at the time of writing this article.

J.C. Penney Company, Inc. (NYSE:JCP)

Get the full fundamental analysis for JCPenney

Free Download

Based on the preliminary financial results for the quarter ended 2013-07-31, we analyze J.C. Penney Company, Inc. (NYSE:JCP), Inc. relative to its peers (scroll to the end of the post for the list of peers). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-07-31 2013-04-30 2013-01-31 2012-10-31 2012-07-31
Revenues 2,663.0 2,635.0 3,884.0 2,927.0 3,022.0
Revenue Growth % 1.1 (32.2) 32.7 (3.1) (4.1)
Net Income (586.0) (348.0) (552.0) (123.0) (147.0)
Net Income Growth % N/A N/A N/A N/A N/A
Net Margin % (22.0) (13.2) (14.2) (4.2) (4.9)
ROE % (Annualized) (90.4) (46.1) (66.2) (13.7) (15.5)
ROA % (Annualized) (21.3) (13.8) (21.4) (4.5) (5.4)

Valuation Drivers

J.C. Penney Company, Inc. (NYSE:JCP), Inc. trades at a lower Price/Book multiple (1.3) than its peer median (2.0). JCP’s earnings and EBITDA are both negative which suggest that P/E or Price/EBITDA are not meaningful to make this analysis between operating advantage (ROE) and growth expectations (as suggested by P/E or P/EBITDA).

The company does not seem to have a viable operating strategy as is evident from low net profit margins (currently -13.3% vs. peer median of 4.9%) and poor asset turns (currently 1.1x compared to peer median of 1.5x). We classify this operating model as problematic relative to its peers. JCP’s net margin is its lowest relative to the last five years and compares to a high of 3.1% in 2009.

Growth & Investment Strategy

J.C. Penney Company, Inc. (NYSE:JCP)’s earnings and EBITDA are both negative which suggest that P/E or Price/EBITDA are not meaningful for an analysis between historical growth (using annualized three-year revenue growth) and investor growth expectations (as suggested by P/E or Price/EBITDA)

The company’s annualized rate of change in capital of -9.0% over the past three years is less than its peer median of -3.3%. This below median investment level has also generated a less than peer median return on capital of -4.1% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Earnings Quality

J.C. Penney Company, Inc. (NYSE:JCP)’s reported relatively weak net income margins for the last twelve months (-13.3% vs. peer median of 4.9%). This weak margin performance and relatively conservative accrual policy (6.2% vs. peer median of 3.3%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

The company’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Quarterly Revenues Trend for JCPenney (NYSE:JCP)Annual Revenues Trend for JCPenney (NYSE:JCP)

Quarterly Accruals Trend for J. C. Penney Company (NYSE:JCP)Annual Accruals Trend for J. C. Penney Company (NYSE:JCP)

JCP Peer Set

We use the following peer-set for our analysis: Macy’s, Inc. (NYSE:M), Kohl’s Corporation (NYSE:KSS), Nordstrom, Inc. (NYSE:JWN), Sears Holdings Corporation (NASDAQ:SHLD), Dillard’s, Inc. (NYSE:DDS) and Saks Inc (NYSE:SKS).

Get the full fundamental analysis for JCPenney

Free Download

Disclaimer

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Most Expensive Rum Brands in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!