This earnings season has been a disaster for retail stocks.
V.F. Corporation (VFC) — owner of more than 30 retail brands including The North Face and Lee— saw its earnings and sales decline from last year. Department store giant Kohl’s (KSS) also reported weak earnings and sales results. The company said it expects much slower growth for the rest of the year.
The Gap (GPS) reported a 33% drop in fourth quarter profits. The owner of Old Navy and Banana Republic also warned of tougher times ahead. This followed weak reports from retailers Macy’s (M) and Wal-Mart (WMT) who announced layoffs and store closings after a weak holiday season.
Most of the commentary coming from these companies was worrisome. Their concerns include rising inventory (fewer sales of winter clothes due to warmer weather), a slowdown in consumer spending, and a strong U.S. Dollar (which hurts sales for companies with exposure outside the U.S.).
Based on these concerns, most analysts expected J.C. Penney (JCP) to also report weak earnings. After all, the department store chain has underperformed the market for years. They lost huge market share to competitors and some analysts believed the company would eventually go bankrupt.
Analysts were dead-wrong. J.C. Penney reported blockbuster fourth quarter results. In fact, it was one of the lone bright spots amid so many terrible reports from retailers.
J.C. Penney rose more sharply following its earnings results. However, it’s not too late to buy shares. Based on my estimates, the stock could easily return more than 50% or more over the next 12 months.
Let me explain…
Last week, J.C. Penney reported earnings that easily surpassed Wall Street estimates. Shares rose 15% on the news to a new 52-week high.
These solid results were not just from cost-cutting. The company actually saw huge demand for its products and more customer traffic.
For example, same-store sales (SSS) rose more than 2% for the quarter. Plus, J.C. Penney said it expects SSS to rise up to 4% for 2016. SSS is an important gauge used in the retail sector. It tracks the sales of stores that have been open for longer than one year.
J.C. Penney also said its mid-tier customers increased spending over the past year. These are customers with household income of roughly $60,000 per year. This comment was shocking compared to the weakness being expressed by almost every one of its competitors.
More important, J.C. Penney said it expects to report its first annual profit in five years in 2016. They also expect to generate over $1 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) this year.
To put this in perspective, J.C. Penney said (over a year ago) it would generate $1.2 billion in EBITDA by 2017. It seems this goal will be achieved more than a year ahead of schedule.
This is a big deal.
Not long ago, some of the world’s best analysts believed J.C. Penney would eventually file for bankruptcy. They were losing tons of customers to competitors and had no clear cut business strategy.
Today, J.C. Penney’s new management team has clearly turned the company around. CEO Marvin Ellison — who was hired in October — has already returned the company to profitability. This is only one of his goals as he plans on making J.C. Penney one of the best department stores in the industry again.
Based on these strong results, most bears will have to re-rate the stock. This includes the 16 institutional analysts who have a hold or sell rating J.C. Penney. It also includes the investors who are short the stock (35% of float is short).
J.C. Penney’s strong earnings are not an aberration. It was not due to some one-time earnings gain or tax benefit. And it’s not the result of excessive cost cutting — which can artificially inflate earnings.
The company is seeing more traffic in stores. These customers are spending more money at J.C. Penney compared to their peers. And based on the comments from other department stores, J.C. Penney looks to be finally taking market share from its competitors.
If this trend continues, J.C. Penney could easily see its stock pop to $15 a share. That’s about 50% upside from the current price. This would give the company a market-cap of roughly $4.5 billion, or just 30% the size of competitor Macy’s market-cap.
As always, please be sure to do your due diligence before buying any stock. But all my research suggests this is a $10 treasure that could soar much higher over the longer term.