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J.C. Penney Backs Off Growth Plans

Posted: Apr 21, 2008 11:20 AM by Glenn Curtis

Tickers in this Article: JCP, RL, SHLD, M

It was only a couple of months ago when there was a buzz surrounding J.C. Penney (NYSE:JCP). The old retail stalwart was touting the restorative powers of its new American Living brand, and it looked to be a spring filled with hope. Now, thanks to a downbeat Q1 forecast and management's plan to scale back new store openings, that excitement is all but extinguished.

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Limiting Growth a Necessary Evil
J.C. Penney's revised store opening plans for 2008 were announced at an analyst day this past week. Instead of 50 new stores we can now expect 36. The company also scaled back its remodeling plans down to 20 stores from 65. This tells investors what they need to know about the future of J.C. Penney and its stock.

Putting the brakes on expansion for the year probably had to be done. Given the competition J.C. Penney is seeing from other major department stores such as Sears (Nasdaq:SHLD) and Macy's (NYSE:M) and the slowing economy, caution is no doubt the best option. However, it does suggest a couple of worrisome trends.

To me the new plan implies that management hasn't a clue as far as how things are going to shake out even a couple of months down the road. Why else would it scale back its openings by nearly 30%, and cut its renovations in more than half? The move also sends the analyst community the message that if you cover us, you better make sure you're modeling the right growth or you run the risk of being disappointed. Look for the sell side to ratchet down their earnings estimates even further in the weeks ahead. Over the last 30 days the average estimate for the year ending January 2009 has already declined to $3.31 per share from $3.94. (To learn what these expectations mean, check out Earnings Forecasts: A Primer and Can Earnings Guidance Accurately Predict The Future?)

Don't Expect A Quick Turnaround
At the analyst meeting, management tried to keep the focus on the potential of its American Living brand, which is created by Polo Ralph Lauren (NYSE:RL). However, several comments came out that signal a turnaround isn't in the cards for at least a couple of quarters.

The Associated Press reported that CEO Mike Ullman said that the company is taking "a hard look" at 2009, and that it will hammer out store growth figures for next year by the summer. In reference to the lingering economic woes, Ullman also said that he thinks it will take a while before business is "predictable".

When you read between the lines this means not only will this year be affected, but next year may be a question mark as well. Additional growth cuts could be coming. The comments also left me wondering if management will scale back full-year earnings guidance. It certainly seems possible given management's uncertainty.

The Upshot
J.C. Penney has staying power. After all, it's been around since around 1902 and has survived many economic cycles. In addition its management team isn't sitting still. It's worked hard at bringing the American Living brand to market and publicizing it, and I do think it has potential. (For more information, read Understanding Cycles - The Key To Market Timing.)

Bottom Line
Given the storm in the retail sector, a mid-range retail like J.C. Penney had little choice but to scale back its expansion plans. It's good that the company came clean about the problems it is facing, but this still does very little to convince me to bottom fish the stock. At the very least I'd wait to see some evidence of stabilization before becoming involved.

To learn how to evaluate retail stocks like J.C. Penney, read Analyzing Retail Stocks.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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