The three-legged stool on which the rating is based is the company’s new management, the coming analyst day scheduled for October 8 and more store closings after the end of the year. Boss acknowledges that comparable store sales get more difficult to blow by starting in the third quarter, but he believes that the additional store closings will more than make up for the company’s projected same-store sales growth in the mid-single-digit range. As cited at Barron’s, Boss wrote:
[B]ased on our analysis, every 100 stores closed is $150 accretive to EBITDA, which holding our 6.6x EV/EBITDA multiple (dept. store average) would equate to $3.00 incremental equity value ($ie. $14 equity value for 100 store closing all else held constant.
J.P. Morgan’s free cash flow analysis likewise depends on J.C. Penney closing more stores. The cash savings from shuttering another 100 stores would be used to pay down near-term debt of $200 million and debt maturities of $400 million through the 2016 fiscal year.
When J.C. Penney reported second-quarter earnings on August 14, the company only said that it expected free cash flow to be positive this fiscal year. Closing another 100 poorly performing stores next year only appears to boost free cash flow by cutting investments in stores that J.C. Penney probably wouldn’t have spent any capital on anyway.
The retailer currently operates about 1,060 stores, after closing 33 stores this year. Adding $3.00 a share to a $10 stock based on a 10% reduction in stores seems optimistic.
But J.P. Morgan’s arithmetic carried the day for the stock on Monday. Shares traded at $10.64, up about 4.4%, in the noon hour. The stock’s 52-week range is $4.90 to $14.65.
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