J.C. Penney Should Press Its Advantage
J.C. Penney's turnaround is starting to pay off.
Nestled in an announcement Monday about how the department-store operator plans to add appliance showrooms to nearly 500 of its stores was a pledge to hit $1 billion in Ebitda this year. The buoyant attitude suggests the retailer will report better first-quarter results than expected later this week. It's also an answer to a New York Post article last week suggesting the company was more desperate than previously thought, which had sent the stock reeling.
The cheery Ebitda forecast is significant; J.C. Penney hasn't booked such numbers in the five years since (the now-ousted) Ron Johnson took over as CEO and nearly ruined America's fifth-largest department store by sales. As a reminder, under Johnson, J.C. Penney's Ebitda went from more than $1 billion in fiscal 2012 to negative $780 million in fiscal 2013, according to Bloomberg data. The company threw money after store remodels and pricing changes that fell flat with customers. It took another two years before Ebitda would be positive again.
Current CEO Marvin Ellison's efforts to right the company are notable for their common sense. In direct contrast to the flashiness of the former Apple executive Johnson, Ellison is making more mundane but effective changes, as detailed in a recent Fortune account -- basic stuff, such as moving men's shoes into the men's section and away from women's shoes. He's also revamping big businesses such as the department store's hair salons, appliance and home sections and private brands.
Customers have noticed. They are starting to favor J.C. Penney over rivals such as Macy's, which is struggling to keep up. Wall Street has noticed, too; analysts have increased their 12-month target price for J.C. Penney's stock to around $12, from less than $10 in January.
But Ellison shouldn't take a breather just yet. J.C. Penney's earnings are still less than half what they were before the 2008 financial crisis. Likewise, the nearly $13 billion in expected revenue this year pales in comparison to $32 billion annual revenue in the early 2000s.
Bloomberg Intelligence analyst Poonam Goyal estimates it could take a decade for J.C. Penney to get back to where it was in 2011, when it booked $17 billion in sales, assuming 3 percent annual revenue growth -- a level higher than its competitors.
Goyal also notes that, as J.C. Penney is focused on paying down debt and revving up sales growth -- certainly important in the near term -- it has dropped its focus on other important investments. For instance, its capital spending fell to $320 million in 2015, compared to more than $1 billion at Nordstrom and nearly $900 million at TJX Cos. That's a worrisome sign as competitors move ahead with spending on new technology, e-commerce capabilities, and store upkeep.
Hitting milestones is nice, but as Under Armour CEO Kevin Plank recently told investors: "Today's record becomes tomorrow's benchmark."
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