The two very different sides of J.C. Penney


The two very different sides of J.C. Penney

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The two very different sides of J.C. Penney

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Editor's Note: The following is a guest post from Yahoo Finance guest contributor Brian Sozzi. He is the CEO & Chief Equities Strategist of Belus Capital Advisors.

Woah. JC Penney’s (JCP) blood-ridden holiday financial report lit up Twitter and Facebook feeds on Wednesday evening in the same manner as slot machines do inside of Vegas casinos. To the untrained eye, JC Penney exited 2013 resembling a company that is a single economic shock away from going out of business, with a tattered balance sheet, overstated fixed asset values, and an eye-poppingly bad full year net loss. In this regard, JC Penney resembled one head of a mystical puppy monster (ugly), barking uncontrollably that it could bite your portfolio by 25% in three months if so inclined to buy the stock on short-term strength.

Then there was the other head of the JC Penney puppy monster on display, the cute little fella, comprised of executives flirting with stock analysts, assuring that things at the company were starting to improve quickly. The cash flow outlook is suddenly less dire than a couple months back, people are buying oodles of merchandise from fully stocked basic apparel sections, and the online business is hot again for this apparent pioneer in the business, with no credit to a fumbled Super Bowl tweet.

So how do these two sides of the same company break down?

Head One: The Ugly Puppy

What all but jumps off the page:

• You have a holiday quarter held up by the company’s traffic-driving Sephora division (makeup needs to be replenished…) and a home division which was in full clearance mode throughout categories. Women’s apparel was not a top-performing area, neither was children’s. These are two key divisions for the company, especially if it’s going to earn profits in must-shop periods such as back to school and the holidays.

• JC Penney expects to end 2014 with $2.0 billion in total liquidity, the same as it had to start the year. So on a mid-single digit percentage, same-store sales result (as guided to), JC Penney is not expected to improve its total liquidity year over year. Huh?

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• The fact remains: for JC Penney to survive, JC Penney must now transition to double-digit percentage positive same-store sales following dreadful year earlier figures AND renewed promotional activity in the store. Fiscal year 2014 guidance has outlined a mere mid-single digit percentage positive same-store sales result.

Head Two: The Cute Puppy

From the inside world that is Wall Street stock analysis:

• Geeky metrics captivate the minds of financial modelers: Conversion, or JC Penney’s ability to drive a sale from someone visiting the store, was “largely” positive in the holiday quarter. This fit snuggly with JC Penney’s mention of stronger profit margins in its inventory restored national and private label brands. That bodes well, in the minds of the Street, for spring as JC Penney unveils new brands, executes on initiatives to ring in higher profits form its vital home division following a very poor 2013, and attempts to hike prices before slapping 50%-60% off signs on countless racks.

• Really out in the weeds stuff: JC Penney not only gave investors “trough” 2014 cash flow guidance of $1 billion (decoded: this is a supposed worst-case scenario for JC Penney’s cash outlook for the year), but it actually guided to the possibility of positive free cash flow when 2014 numbers are released in February 2015. JC Penney has delivered free cash flow since the calendar year 2011. The read: JC Penney is not burning cash to facilitate the last stage of its epic turnaround, and therefore won’t have to seek outside capital that penalizes shareholders. Tons of aggressive assumptions here.

Similar to a mystical two-headed puppy monster, the real-life JC Penney is not your typical company to analyze.

Bonus Fact: @JCPenney does NOT expect to announce any store closures in 2014.

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