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Hey all you momentum investors: Tired of watching your favorite tech stocks get pummeled? How about considering a retailer that's up 40% in the past three weeks? It's J.C. Penney (JCP).
O.K., that was a joke, sort of. While Penney is up 40% since late April, what investors know most about the ailing department-store chain, if they know anything, is its precipitous share-price decline over the past year. From a high last May of $54 it had dropped to a low of $13 recently.
Since then, Penney's stock has gotten a lift from the kind of news investors love. On May 4, the company announced that Chief Executive James E. Oesterreicher will retire earlier than expected, raising the possibility that a new CEO will come in and turn things around. Then on May 10, Penney confirmed that corporate raider Carl Icahn had received approval from the Federal Trade Commission to buy a stake in the company. The shares closed on May 11 at a hair under 18.
Still, while the $5 move in recent weeks makes for a nice percentage gain for investors who bought at the bottom, Penney has a long way to go before it can be considered a true turnaround. Icahn's potential purchase and Oesterreicher's eventual departure may prove real catalysts. But Wall Street, which has been repeatedly disappointed by Penney, will need to see more before it really backs the stock.
WIGGLE ROOM.
First of all, although it's safe to assume that Icahn, a known bottom-fisher, sees some value here, his ultimate intentions are unclear. His filing allows him to buy more than $15 million (not a significant amount vs. the company's $4.7 billion market capitalization) and less than 15% of the outstanding shares. That leaves a lot of wiggle room when it comes to assessing any impact he may have.
Analysts don't expect him to make the kind of takeover play that would really propel the stock price, although plenty of rumors to that effect are swirling. "Does he want to run a retail chain such as J.C. Penney? Personally, I doubt it," says Kurt Barnard, editor of Barnard's Retail Trend Report, which forecasts industry trends. Rather, Icahn hopes to turn a profit on his shares, Barnard and other analysts believe.
The departure of Oesterreicher, who proved unable to lift the chain's sagging sales, can be taken as a sign that the company is serious about reviving itself. But Wall Street had great hopes for him when he became CEO in 1997. And he has hardly been idle since. Oesterreicher is credited with closing nonperforming stores, selling off some assets to bring down debt, acquiring faster-growing drugstores, and improving the management team. Still, as a 36-year company veteran, he wasn't able to change the corporate culture of decision-by-committee, says Barnard, who calls Penney "the worst managed major retail chain in the U.S."
REASON TO SHOP.
The hope is that the board will bring in new blood that will, as PaineWebber analyst Jeffrey Edelman puts it, "stay abreast of what's happening in the real world." The new CEO will have to tackle Penney's central problem: Three years of declines in same-store sales. "They haven't given customers a reason to come into the stores," says Bank of America analyst Joseph Grillo. "They've got to get the message out that J.C. Penney provides good value and good products." Don't expect a quick fix, say analysts, who attribute the declining customer base to misjudgments on marketing and merchandising.
As other stores draw customers with a more appealing mix of merchandise at attractive prices, the challenge only more difficult for Penney, which is being squeezed by discounters such as Target and Wal-Mart, as well as by trendier rivals, like Old Navy. "They've got their work cut out for them," says Grillo.
Indeed. Standard & Poor's downgraded the company's long-term credit rating from BBB+ to BBB on May 4, noting that Penney failed to rebound in 1999, a year when its competitors largely performed well. "J.C. Penney may ultimately be successful in turning around its department-store business, but the time frame involved may be lengthy, and progress could be impeded by a change in the economic environment and by intense competition," reads S&P's analysis.
BRIGHT SPOTS.
Stock analysts are hardly more favorable (although not so quite so forthright). According to First Call, which tracks analyst opinions, the consensus for Penney's first-quarter results, due out May 16, is for operating earnings of 21 cents a share, down from 61 cents for the same quarter a year ago. For the fourth quarter of 1999, reported Feb. 24, analysts were expecting Penney to earn 47 cents a share, but the quarter came in at 45. The average recommendation amounts to a hold.
That isn't to say that Penney has nothing going for it. Based on the value of its combined assets (which includes things like its direct-marketing arm, which it may sell; its Eckerd drug store chain, which it hopes to spin off; and lots of valuable real estate), the stock is cheap. Edelman recommends accumulating the shares and thinks the stock could trade as high as the mid-twenties near-term. S&P notes that Penney has "ample financial flexibility" with $3 billion in bank lines of credit and access to capital markets. Other bright spots are its e-commerce site and its catalog business. It's 6.4% dividend yield provides a nice income stream for investors who are willing to wait for a turnaround.
While the recent news has created some excitement among investors, what Penney really needs to do is create excitement among shoppers. Given the intense retail competition and its declining customer base,that's going to be a tough job -- no matter who the next CEO may be.
Stone writes about the markets for Business Week Online What's your take on J.C. Penney? Talk about it on our Ask Amey Stone Forum
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