Is Bullish Analyst View of JC Penney Reasonable?

A portion of the analysts’ reasoning was published by Barron’s Monday morning, and here are a couple of excerpts:

Critical to our thinking and key to JC Penney’s future, ecom/omnichannel development initiatives have re-accelerated starting with the re-integration of online and stores. Importantly, JC Penney’s history/existing foundation in the catalog business serves as a competitive advantage, as it enables further investment to be concentrated in digitizing the existing infrastructure. …

[T]he direction of fundamentals is positive and we like the portfolio of company-owned real estate (estimated to have value of ~$3.7 billion). Although the majority of this portfolio is collateral for a $2.25 billion term loan, the value locked up in this asset cannot be ignored. …

We feel that with improving trends, turnaround initiatives under way, management talent being added, the value of the owned real estate, the JC Penney equity is becoming more attractive. Importantly, coming off deep declines in productivity, we believe that the business can potentially improve even within a challenging environment.

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This is the story that followed on J.C. Penney’s second-quarter earnings report, and the B. Riley analysts may be right about the potential, but it is far from clear that J.C. Penney can make it happen. The company’s history in the catalog business is yesterday’s news — or perhaps even the day before yesterday’s. How a mail-order catalog business of years ago relates to today’s e-commerce is less than crystal clear.

And the $3.7 billion in real estate, of which $2.5 billion is already being used as collateral? The analysts say that there “appears to be an opportunity” to either refinance or pull some collateral out of the existing loan and “potentially sell some of the real estate to pay down debt and/or invest more aggressively in various operating initiatives.” Fine, but J.C. Penney needs to do both, and while that is possible, it is also not terribly likely.

B. Riley’s final point is correct. Sales have been improving, because they could not have gotten any worse and allowed the store to survive. The company could dig itself out eventually, but B. Riley may be a little aggressive in looking for that to happen in fiscal 2016.

Regardless of our opinion, J.C. Penney stock traded up 3.2% in the noon hour Monday, at $8.79 in a 52-week range of $5.90 to $11.30. Short interest in the stock is more than 15 million shares higher than it was a year ago, at 97.5 million shares short, and days to cover have risen from just over three to more than 11.

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