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JC Penney Stock Up 16% in a Month: Is the Gain Short-Lived?


Shares of J. C. Penney Company, Inc. JCP are riding high on new loyalty program, top-line growth and store optimization plan. In a month, the stock has advanced 16.3%, outperforming the industry’s gain of 12.8%. The recent surge in stock price is big relief for investors, as the company has been grappling with a tough retail scenario for quite some time. Nevertheless, despite this bullish run in share price the company has still some concerns to address. So, is this gain short-lived or will the stock has more room to run? Let’s delve deeper and find out.

Top Line Back on Track

J. C. Penney, which reported second-quarter fiscal 2017 results in August, impressed investors with its top-line performance. The company’s total net sales surpassed the Zacks Consensus Estimate after missing the same in the trailing five quarters. Moreover, total net sales also increased 1.5% in the second quarter, following a decline of 3.7% in the previous quarter. Further, the company witnessed sequential increase in apparel business, driven by substantial improvement in kids’ apparel. Sturdy performance was witnessed across Sephora, Home, Salon and Fine Jewelry divisions.

Recently, in an effort to lure more customers and ramp up sales performance, the Zacks Rank #3 (Hold) company has enhanced the loyalty program which was introduced for the first time in 2008. Per the new reward program, every customer will get $10 reward for every 200 points earned. Further, there is no cap for receiving the reward of $10 per month.

Stores Rationalization Program

Further, to better align stores with its omni-channel network and utilize capital resources in locations where the company has ample opportunity, J. C. Penney had earlier announced strategic initiatives, which include shutting of two distribution facilities as well as nearly 130-140 stores. The closure of stores, which represents nearly 13-14% of store portfolio, is likely to hurt total annual sales by less than 5%. The company expects annual saving of nearly $200 million from the store closure program.

Sephora: One of the Driving Factors

The in-store Sephora departments continue to outperform by drawing more customers. During fiscal 2016, the company opened 61 Sephora stores. In the second quarter of fiscal 2017, the company opened 32 Sephora stores and also completed the expansion of 31 Sephora stores. At the end of reported quarter, the total count of Sephora locations inside J. C. Penney was over 600 stores. In the third quarter, the company expects to open 38 new Sephora stores. Sephora is doing exceptionally well and is one of the best performing categories.

Hurdles to Cross

Decline in comparable sales has been a major concern for the investors. In the second quarter, comps decreased 1.3%, compared with an increase of 2.2% in the prior-year quarter. In the first quarter, comps have declined 3.5%. Comps had also declined in the fourth and third quarter of fiscal 2016, by 0.7% and 0.8%, respectively. In fiscal 2017, the company anticipates comps to be in the range of down 1% to up 1%.

Further, J. C. Penney continues to struggle with high-debt levels. At the end of the reported quarter, total long-term debt was $3,836 million, reflecting debt-to-capitalization ratio of 77.5%. Earlier, the company had announced plans to lower net debt to EBITDA ratio to less than three times by fiscal 2017.

Hot Stocks in the Retail Space Worth Checking Out

Investors interested in the retail space may consider better-ranked stocks such as The Gap, Inc. GPS, The Children's Place, Inc. PLCE and Guess?, Inc. GES. These stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gap delivered an average positive earnings surprise of 9.3% in the trailing four quarters and has a long-term earnings growth rate of 8%.

The Children's Place pulled off an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

Guess? has an impressive long-term earnings growth rate of 17.5%.

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