J.C. Penney results were only surprisingly good because the past two years have been unsurprisingly bad. Same-stores sales were down 18.9% in the first quarter of 2012 and another 16.6% in 2013. When sales are down that far, anything looks like up. Granted that a rise of 6.2% was better than expected, but in the overall scheme of things it was not much.
The company also touted its strong liquidity, announcing a new $2.35 billion senior secured revolver to replace its existing $1.85 billion term loan. The company said that the additional $500 million will allow it to finish the current fiscal year with more than $2 billion in cash. That assumes, of course, that J.C. Penney can run through the year at least cash flow neutral, and that is certainly not a sure thing.
But the major problem is that J.C. Penney’s strategy for turning its fortunes around are based on a strategy that was enough of a failure to drive the company to hire former CEO Ron Johnson in the first place. Why investors believe that a once-failed strategy will work now is a complete mystery.
In a note to investors cited by Barron’s, analysts at Morgan Stanley said:
JC Penney’s 1Q was better than our/consensus estimates but management’s free cash flow neutral guidance appears optimistic. … JC Penney is moving toward a legacy strategy that has proven unsuccessful before.
Exactly. J.C. Penney stock will rise and fall by significant amounts over the next several months. The only way to profit from those movements is to get the timing right. Good luck with that.
Shares were down about 2.6% at $9.48 in late morning trading Monday, within a 52-week range of $4.90 to $19.63.
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