Shares of J.C. Penney (JCP) have been trading sideways since late 2013, but I believe that the company is making progress in its turnaround efforts, and this could be a good time to buy the stock.
After Wednesday's close, the retail chain reported a first-quarter loss of $0.55 per share, $0.22 better than the consensus estimate of $0.77. Revenue rose 2% to $2.86 billion, exactly in line with the consensus estimate.
Same-store sales increased by 3.4%, while gross margin was up 330 basis points to 36.4%. Management said it expects gross margin to continue to improve by 100 to 150 basis points. Earnings before interest, taxes, depreciation and amortization increased by 189% to $168 million.
On the call, management guided same-store sales higher, to between 4% and 5%, vs. a 2% to 5% improvement. They expect cash flow to break even this year.
Tailored men's clothing, as well as handbags and dresses, drove the results. Sephora continues to do well. The company announced it will sell Sephora beauty products online later this month, and will continue to expand the brand in stores. There are now more than 500 Sephora stores.
The retailer continues its push back into home goods, a department that was phased out during the Ron Johnson era. Home goods, such as sheets and towels, drive customer traffic. Penney is also expanding its children and footwear departments for much the same reason. Private label brands, which were dropped in 2013, are coming back strong and now make up 50% of sales.
The consensus revenue estimate for fiscal 2016 is $12.6 billion and $13 billion in 2017, up 2.6% and 3%, respectively. Operating losses should continue to narrow as gross margins continue to improve. Analysts are looking for a loss of about $1.54 per share in fiscal 2016 and $0.79 in 2017. This compares to a loss of $2.67 in 2015 and a $5.57 loss in 2014.
I won't sugar coat it: This turnaround is difficult. The environment is highly competitive and very promotional in nature. Some investors might be disappointed that revenue didn't grow faster. The company is entering the second year of its turnaround and needs to find new ways to drive improvements, rather than simply lap departed CEO Ron Johnson's mistakes. Interest payments of $400 million a year on $5.3 billion of debt are holding back results.
But I believe J.C. Penney can reach $10 per share by the end of next year, as investors regain confidence in the company.