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JC Penney Off to Strong Start in 2018: Will it Sustain?

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Shares of J. C. Penney Company, Inc. (JCP - Free Report) have made a great start to 2018, with stock gaining over 17% in the first two trading session of the year. The recent gain in stock price can primarily be attributed to the market experts’ anticipation of the company having robust holiday season.

Moreover, the company’s efforts towards remodeling, renovation and refurbishment of stores with special attention on enhancing the reach of national and especially private-label brands also bode well. Nevertheless, despite the recent run in share price the company has still some concerns to address. So, is this gain short-lived or does the stock still have more room to run? In a year, the stock has decreased 52.9%, wider than the industry’s decline of 0.1%. Let’s delve deeper.

Robust Holiday Season

The latest addition to the streak of encouraging economic indicators is the holiday season sales data from Nov 1 to Dec 24, 2017, reflecting an increase in consumer spending. According to MasterCard SpendingPulse, sales (excluding automobiles) during the period jumped 4.9% compared with 3.7% rise in the prior-year period. This marks the biggest year-over-year increase in holiday spending since 2011.

Per report, sales of electronics and appliances, jewelry, and home furnishings rose 7.5%, 5.9% and 5.1%, respectively. Meanwhile, specialty apparel as well as department stores witnessed “moderate” sales increase.

Solid Performance of Sephora Stores

The in-store Sephora departments continue to outperform by drawing more customers. During fiscal 2016, the company opened 61 Sephora stores. In third-quarter fiscal 2017, the company opened 38 Sephora stores, bringing the total count to 70 so far in fiscal 2017. At the end of the reported quarter, the total count of Sephora locations inside J. C. Penney was 642 stores.

Sephora is doing exceptionally well and is one of the best performing categories. These shops are part of J. C. Penney’s strategy to gain a competitive advantage over other beauty product retailers and drugstores, which have significantly enhanced their cosmetics sections in the recent years. Since Sephora is part of J. C. Penney’s long-term growth strategy, the company not only intends to add more stores but has also started selling Sephora products online.

Omni-channel Initiatives & Loyalty Program

The Zacks Rank #3 (Hold) company continues to work on improving omni-channel reach. As online shoppers shop more than average customers, improving their shopping experience is the key to building a strong online portal. To drive more traffic online, the company is providing convenient shipping and pickup options like pick up in store same day facility, ship to any J. C. Penney store and faster home delivery across its store network. The company has made investments to boost supply chain efficiency. In third-quarter fiscal 2017, omni-channel initiatives witnessed double-digit growth.

Hurdles to Cross

J. C. Penney soft comps and earnings projections for fiscal 2017 along with high debt are major concern for investors. For fiscal 2017, the comps are projected to be in the range of down 1% to flat compared with the earlier estimate of down 1% to up 1%. Cost of goods sold is now forecast to increase by 100-120 bps year over year. The company anticipates adjusted earnings per share to be in the range of 2-8 cents, sharply below its initial estimate of 40-65 cents.

Moreover, J. C. Penney continues to struggle with high-debt levels. At the end of the reported quarter, total long-term debt was $4,039 million, reflecting a debt-to-capitalization ratio of 78.9%. Earlier, the company had announced plans to lower the net debt to EBITDA ratio to less than three times by fiscal 2017.

Hot Stocks in the Retail Space Worth Checking Out

Investors interested in the retail space may consider better-ranked stocks such as American Eagle Outfitters, Inc. (AEO - Free Report) , Boot Barn Holdings, Inc. (BOOT - Free Report) and The Buckle, Inc. (BKE - Free Report) . These stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Eagle Outfitters has a long-term earnings growth rate of 7.5%.

Boot Barn Holdings has an impressive long-term earnings growth rate of 15.7%.

Buckle has reported better-than-expected earnings surprise in three of the trailing four quarters, with an average earnings beat of 3.8%.

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