J.C. Penney Company, Inc. (JCP) Looks Like a Long-Term Bankruptcy Candidate

Page 1 of 2

Earlier this month, retail analyst Charles Grom of Sterne Agee initiated coverage on troubled department store operator J.C. Penney Company, Inc. (NYSE:JCP) with a buy rating and a $23 price target, which is about 30% above its recent trading range. Grom bases his valuation on a long-term view that J.C. Penney could generate EPS of $2 by 2017. That implies that J.C. Penney would more or less replicate its adjusted EPS of $2.16 from 2010, before the company’s recent turmoil.

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

Grom’s bullish call on J.C. Penney Company, Inc. (NYSE:JCP) is refreshingly courageous; most Wall Street analysts tend to be overly focused on short-term results, rather than long-term trends. By contrast, Grom is clearly focused on long-term opportunities at J.C. Penney, not short-term sales or profit results.

Unfortunately, even from a long-term perspective, there’s not much to like about J.C. Penney. The company was already under pressure before its missteps under Ron Johnson. The mid-price department store segment is not a great place to do business these days, as Sears Holdings Corporation (NASDAQ:SHLD) can attest. Moreover, J.C. Penney has taken on billions of dollars in new debt to fund its capital expenditures and operating losses, adding over $100 million of annual interest payments.

Regaining the $5 billion in sales that it has lost over the last six quarters could take more time than the company can spare, raising the likelihood of an eventual bankruptcy restructuring.  As a result, investors should be very wary of this stock.

Transformation gone awry
Ron Johnson was hired two years ago in order to transform J.C. Penney Company, Inc. (NYSE:JCP) because the department store concept was going stale and financial results were starting to go sideways. In the last year of CEO Mike Ullman’s previous tenure — Ullman was recently brought back as CEO, just a year and a half after his ouster — the company posted a dismal 0.2% comparable-store sales gain.

The external environment has not improved since then, while J.C. Penney has gone into a tailspin; the company lost more than $1.5 billion before taxes last year. Moreover, J.C. Penney’s performance has continued to slide year to date. While analysts expect sales to improve and losses to narrow later this year, the company’s full-year loss will probably be similar to its 2012 results.

To regain its level of sales from 2010 — the last time the company earned more than $2 per share — J.C. Penney Company, Inc. (NYSE:JCP) will need to increase its revenue by 43% beyond its expected 2013 total. In order to accomplish that task by 2017, J.C. Penney would need to achieve a compound annual sales growth rate of more than 9%! Even the most successful department stores today are not growing that quickly.

To some observers, it appears that J.C. Penney Company, Inc. (NYSE:JCP) should be able to get back to $17 billion or $18 billion in annual sales, because the company “only” has to win back the customers it lost last year. In reality, J.C. Penney’s task is not so simple. Sears Holdings Corporation (NASDAQ:SHLD) has seen its domestic comparable-store sales sink every year for the past decade. Total revenue peaked at $53 billion in 2006, but has plunged to less than $40 billion last year.

Weak results in one year have not made it easier for Sears to “recapture” revenue in later years. While Sears lost 25% of its revenue over six years and J.C. Penney lost that much in just one year, the two situations are quite similar. Time has passed these retailers by, and it’s unrealistic to hope for more than modest sales growth going forward.

A short lease on life
J.C. Penney Company, Inc. (NYSE:JCP) recently closed on a $2.25 billion term loan with Goldman Sachs Group, Inc. (NYSE:GS). This gives the company much-needed liquidity, but longer term, this deal looks more likely to be an anchor than a solution for J.C. Penney. The loan will reportedly bear interest at LIBOR plus 5 percentage points, with a LIBOR floor of 5%. Thus, the interest rate will be a minimum of 6%, meaning that J.C. Penney will be on the hook for annual interest payments of $135 million.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

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!