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

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways 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

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

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!