J.C. Penney’s next hurdles big ones too

Last modified: Friday, August 15, 2014
Analysts are weighing in on J.C. Penney’s improved second quarter results, and while liquidity concerns through 2015 have subsided and the company has achieved stability, concerns have shifted to the next phase for Penney.

Standard & Poor’s analyst Tobias Crabtree said this morning that performance trends are positive, but from a credit perspective Penney still has big challenges.

Getting the company to a point where it’s able to pay down its $5.32 billion in debt won’t be easy.

“There are a lot of challenges ahead to regain market share and increase earnings to repay debt and increase capital expenditures in 2015,” Crabtree said in an interview.

S&P believes Penney’s EBITDA, or earnings before interest and other expenses, has to increase to at least $1 billion over the next 12 months to support sustained free cash flow at levels that allow for debt repayment and spending increases in 2015.

That’s higher than the current expectations for 2015, Crabtree said. Penney just reported $90 million of free cash flow in the second quarter. The company historically has made most of its money in the third and fourth quarters from back-to-school and holiday shopping.

Penney will be updating its forecast likely in October when it’s planning an analyst meeting in New York.

To achieve the $1 billion number, Penney has to regain a significant portion of the $5.6 billion in sales lost in 2012 and 2013, Crabtree said.

The rapid decline in Penney’s sales from $17.26 billion in 2011 to $11.86 billion last year doesn’t all have to return.

How much of the sales that Penney needs back depends greatly on its level of profitability. Penney is looking at its stalwart private label brands that were abandoned to make that happen. Chief financial officer Ed Record said Thursday that the company is working on getting more of its private label merchandise in stores.

Restoring key private brands like St. John’s Bay, JF, J.Ferrar, Ambrielle and Xersion have been fundamental to the turnaround progress so far, he said.

Margins on those brands are 3-to-6 percentage points higher than other brands, Record said. Private brand margins will improve as Penney works to get its cost of goods back down to historical levels, he said.

To date, Penney hasn’t been making as much margin on its clearance as it did previously, but it did improve in the second quarter. Penney’s merchandise buyers have done a lot of work to get its product costs down, Record said, but that won’t help Penney with merchandise put on clearance over the next few months because that was already bought. Clearance margins, he said, will start to post bigger improvements in the first quarter.

Liz Claiborne is another brand that Penney owns. It has a new advertising campaign that launches this week with the theme “Love, Liz Claiborne.” The New York Times advertising columnist Stuart Elliott said Brand Keys ranks Claiborne No. 11 on a list of 15 women’s apparel brands.

That’s ahead of Old Navy, the Kardashian Kollection, Worthington, which is also a Penney brand, and Catalina. But while the brand is well known to older department store shoppers, Penney believes it’s relevant for younger shoppers.

It’s aiming at the new 35-year-old.


Another credit analyst Gimme Credit’s Evan Mann said in a note Thursday that he also liked the progress so far from the changes made by CEO Mike Ullman. But he said same-store sales during the back-to-school season will be the first milestone in determining if Ullman can successfully grow sales, improve margins and restore profitability (EBITDA) to a level that covers interest and capital spending.

The second quarter ended on Aug. 2, just as the back-to-school season was starting. Penney said sales were strong during the final weeks of the quarter which represent the beginning of the critical back-to-school shopping season.

While it’s clearly a tough denim cycle, Penney’s own Arizona denim brand “is doing okay, but not great,” Record said in a response to an analyst question during the conference call Thursday. But Arizona’s athletic apparel “is blowing the doors off” as athletic brands are across the store, he said.


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