J.C. Penney Gains as Sales Forecast Signals Turnaround Momentum

Feb. 27 (Bloomberg) -- J.C. Penney Co. surged after forecasting an increase in annual revenue and margin expansion, prompting Chief Executive Officer Mike Ullman to predict its turnaround will be completed this year.

Same-store sales will increase by a mid-single digit percentage and gross margin will “significantly” improve this year, the Plano, Texas-based company said yesterday in a statement. Liquidity at the end of 2014 is projected to hold steady at $2 billion, the company said. The shares rose as much as 17 percent in extended trading in New York.

Ullman’s attempt to revive the department-store chain gained traction during a holiday season marked by a discount war among retailers seeking to attract tentative shoppers. Following losses and plummeting sales caused by former CEO Ron Johnson, Ullman returned to the helm in April and helped the chain post its first same-store sales gain last quarter since the period ended April 2011.

“The most important thing Ullman’s done is to give people confidence, whether its vendors, merchants or store employees,” said Paul Swinand, an analyst for Morningstar Inc. in Chicago. “His strategy is not anything earth shattering. It’s just getting back to where they were, working hard and being smart. Not trying to change too much at once.”

J.C. Penney jumped 14 percent to $6.77 at 6:07 p.m. in late trading yesterday in New York, after reaching $6.96. The shares had declined 35 percent this year through the close of regular trading yesterday.

First Profit

The chain also posted its first profit in more than two years in the fourth quarter, benefiting from Ullman returning the company to its traditional discounting strategy and reviving popular private-label brands.

Net income was $35 million, or 11 cents a share, in the quarter ended Jan. 31, compared with a loss of $552 million, or $2.51, a year earlier, the company said. Excluding the sale of assets and tax benefits, such as a $270 million change in the value of its pension, the company posted a loss of 68 cents a share. The average of 24 estimates compiled by Bloomberg was a loss of 86 cents.

The company has spent the past 10 months improving its finances and operations and now is ready to return to growth and profitability, Ullman said on a conference call with analysts to discuss the results.

“The most challenging parts of the turnaround are behind us,” Ullman said.

Liquidity Concern

Liquidity became a concern after the company wracked up losses and spent heavily on trying to execute Johnson’s transformation of the century-old retailer. After Ullman returned in April, the company raised almost $4 billion in cash through borrowings and a share sale last year.

Despite saying it would have $2 billion in liquidity at the end of last year, Charles Grom, an analyst for Sterne Agee & Leach Inc., wrote in a note to clients on Feb. 19 that the chain may need to raise more capital in a few quarters if the sales recovery doesn’t accelerate.

J.C. Penney’s operations generated $383 million last quarter, down from $645 million a year earlier. That led to free cash flow of $246 million, boosting its cash position 23 percent to $1.51 billion. That coupled with $500 million in borrowing capacity under its credit revolver gave it $2 billion in liquidity at the end of the last fiscal year. It expects to have the same amount by the end of 2014.

Best Performance

Revenue fell 2.6 percent to $3.78 billion, trailing analysts’ $3.86 billion average estimate. Excluding sales during an extra week a year earlier, revenue would have risen 1.6 percent.

Same-store sales, which are a key gauge of a retailer’s growth because new and closed stores are excluded, had the first gain since the quarter ended April 2011. Revenue by that measure, which includes online sales, may increase by as much as 5 percent this quarter. That would be the best performance since the period ended Oct. 28, 2006.

News Source: www.sfgate.com