No News Is Not Good News for J.C. Penney Investors

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J.C. Penney (NYSE:JCP) management may be pleased with the company’s department store holiday sales, but investors are not. On Wednesday, the retailer informed investors that, “The company is pleased with its performance for the holiday period, showing continued progress in its turnaround efforts. Customers responded well to the company’s offerings this holiday shopping season, both in store and online.”

In addition, J.C. Penney reaffirmed the outlook for the fourth-quarter that the company gave along the release of third-quarter earnings. But few other details were provided, and that concerned investors, who bid shares down as much as 8.51 percent to $7.49, on Wednesday morning. With investors expressing little confidence that the resurrection of J.C. Penney’s fortunes will come to pass, the retailer’s stock has already lost 16.65 percent of its value this year to date, which follows the 51.77 percent drop in value the stock experienced in 2013.

Except for a brief period at the end of last year, J.C. Penny investors were hesitant throughout 2013 to subscribe to the nascent recovery story that company executives insisted was underway, as the stock’s movement illustrates. Shares of the century-old department-store chain opened on January 2, the first trading day of 2013, at $20.01, a price 40.71 percent below its year-ago level. On February 22, the stock rose to the highest price it would reach last year, touching $23.10 during the day’s trading. However, from that moment, shares have charted a generally downward course. The replacement of Ron Johnson, whose predecessor, Mike Ullman, took over as chief executive in April, prompted a significant selloff as did the late September announcement that the company would be sell 84 million shares in a public offering to raise cash. Following the news, shares dropped to what was then a 13-year-low of $9.93 per share. Share price continued to drop, pressed to further lows by concerns for the company’s liquidity.

Just days before the stock offering was announced, Goldman Sachs analyst Kristen McDuffy authored a research note that spooked investors. “Weak fundamentals, inventory rebuilding, and an under-performing home department will likely challenge J.C. Penney’s liquidity levels in the third-quarter,” she wrote, prompting speculation that a bankruptcy filing was in the company’s near future. An analysis prepared by Fitch Ratings came to a similar conclusions: liquidity levels are concerning.

After Ullman returned to J.C. Penney in April, the company “moved quickly to stabilize our business — both financially and operationally,” as the Chief Executive explained in the retailer’s second-quarter earnings report. The second-quarter was the first full period under Chief Executive Mike Ullman, who returned to J.C. Penney after his successor Ron Johnson was ousted by the board in April. Johnson, the former Apple (NASDAQ:AAPL) executive that was hand-picked by board member and largest shareholder Bill Ackman, led the company to a 25 percent plunge in revenues, a 50 percent decline in stock price, and a 13 percent drop in customer traffic — solid proof that the makeover he attempted to orchestrate was a failure. Since his departure, convincing the company’s traditional customer base to return has been of utmost importance.

The recovery campaign — which depended on leaving behind Johnson’s disastrous implementation of a new pricing structure that dropped sales and discounts in favor of “everyday low prices” — did return results. At the beginning of last month, the company reported that November same-store sales, a key indicator of retail health, rose 10 percent, a far greater improvement than analysts expected. That gain followed a 0.9 percent increase in October, which was the companies first month-over-month increase in almost two years and a sign that the change in strategic direction employed by retailer’s management had begun to show fruits. To J.C. Penney, it was evidence that the company has made “meaningful progress in its turnaround” and “significant progress in addressing the challenges it faces.”

Alongside the release of third-quarter earnings on November 20, J.C. Penney forecast that same-store sales and gross margins were expected to improve sequentially and on a year-over-year basis.

But the latest update to the company’s recovery was hardly convincing evidence that J.C. Penney’s recovery efforts were progressing. As Sterne Agee analyst Charles Grom wrote in a research note acquired by the Wall Street Journal, “the length of JCP’s holiday update tells you everything you need to know about the company’s performance during the five-week December period.” Or in other words, “our gut tells us that if JCP had a good print in their back pocket — they would have disclosed it in far greater detail.”

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