J.C. PENNEY CO. INC. $24(New York symbol JCP; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 218.8 million; Market cap: $5.3 billion; Price-to-sales ratio: 0.3; Dividend suspended in May 2012; TSINetwork Rating: Extra Risk; www.jcpenney.com) operates more than 1,100 department stores in the U.S. and Puerto Rico. It also sells goods over the Internet.
In response to strong competition from discount retailers, Penney is shifting to an everyday pricing strategy. The company feels that predictable prices will spur customers to visit more often instead of waiting for items to go on sale.
Penney is also remodelling its stores to feature more in-store boutiques devoted to single brands, such as its Sephora beauty and fragrance shops. As well, the company is investing in new computer systems and simplifying its purchasing.
In its 2013 second quarter, which ended July 28, 2012, Penney spent $159 million on its restructuring. Even if you exclude these costs, the company lost $81 million, or $0.37 a share, in the quarter. A year earlier, it earned $41 million, or $0.19 a share. Sales fell 22.6%, to $3.0 billion from $3.9 billion. That’s partly because Penney closed its catalogue business in October 2011. Same-store sales fell 21.7%.
To conserve cash while it completes its transformation, the company has suspended share buybacks and its quarterly dividend of $0.20 a share.
Even so, the company’s balance sheet remains sound. Its long-term debt of $2.9 billion is a high, but manageable, 55% of its market cap.
Penney also holds cash of $888 million, or $4.06 a share. It will use some of this to repay $230 million of notes in August 2012. Penney still feels it cash holdings will rise to $1 billion by the end of fiscal 2013.
In light of the dividend suspension, we’ve cut Penney’s TSINetwork Rating from Average to Extra Risk. But we still feel that its new strategy will help it compete with other retailers and ultimately lead to higher profits and dividends.
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