It’s been said that a rising tide lifts all boats. However, that may not be true in reverse. An ebbing tide sinks some boats, but can lift others. That may end up being the case with J C Penney Company Inc (NYSE: JCP), which appears to be benefiting from tough times over at Sears Holdings Corp (NASDAQ:SHLD).
JCP Stock Has Sears to Thank
After a 1.7% comparable sales increase in the third quarter, comps rose 2.6% in the most recent quarter. As I’ve often said, comparable sales increases between 1% and 3% for retail operation is fine. It’s not fantastic. It’s not blockbuster. It’s fine. However, in the case of a struggling retailer like JCP, 2.6% feels like a blockbuster increase.
Interestingly, this may have to do with the fact that Sears has virtually ceded its market share to other retailers in a number of important categories. I think were seeing this effect in the incredible sales growth at JCP in appliances, mattresses, and furniture. Those product lines saw sales growth of 30%, 60% and 40%, respectively. JCP stock management has identified 300 malls where it will pursue aggressive sales of these product lines.
The trouble facing JCP stock has been debt load. Along with other similar retailers, JCP stock management has been aggressively reallocating its capital so as to reduce the threat of debt maturities. During the quarter, JCP stock management repaid $211 million on its credit line. It repurchased $40 million of senior notes due in 2020. Just after the quarter ended, it also repaid $190 million worth of senior notes due later this year.
JCP is not done yet. It’s also close to repurchasing all of its senior notes due next year, and is 70% of the way towards repurchasing its 5.65% Senior Notes due 2020. It issued $400 million worth of 8.625% debt due in 2025 to repurchase these notes.
This leaves JCP stock with between $300 million and $350 million in cash. That should be enough to keep it going during the year. J C Penney stock traditionally runs negative free cash flow through the first three quarters of the year. However, if it continues to see sales growth in these home product lines then the cash flow situation may turn out to be more optimistic than originally projected.
The long-term problem is J C Penney remaining relevant in a retail environment that simply does not favor brick-and-mortar. Admittedly, a lot of retailers delivered upside surprises in the fourth quarter. That may very well continue going to this year as the Trump economy continues to boom.
So JCP stock is going to be pulled by crosscurrents. On the one hand, retail is moving increasingly online, yet macro economic conditions seem to favor it.
Bottom on Line JCP Stock
I don’t see JCP as a compelling turnaround story. I see it the way I’ve seen it for quite some time: it’s a speculative play.
I think the way to play J C Penney stock is as a trade. I would look to buy below $2.70 per share in increments. Then, I would turn around and sell 25% of my position beginning at three dollars per share and selling another 25% for every 25-cent increase in the stock.
Those of you who believe in potential turnaround may want to grab some shares in the mid-$2 range and just hold for a very long time. It’s entirely possible that, over time, you will see a big return.
It’s also possible that you will see that investment slowly trickle down over time.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.