Is J.C. Penney's Rally For Real?
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There’s a sense of rising optimism surrounding J.C. Penney (NYSE: JCP), and it pertains to its new sources of capital. The company was able to raise funds recently by accessing both the debt and equity markets. Shares have responded positively in recent weeks on hopes that the company’s new cash and new Chief Executive Officer can finally turn the company around.
Whether the embattled retailer is finally on more solid financial footing is questionable at best. At this point, investors need to decide whether the recent rally is a positive sign of things to come, or whether they should take profits on the heels of the recent upturn.
Flush with cash, but does it matter?
First, it was revealed that renowned investor George Soros, through his firm Soros Fund Management, took a nearly 8% stake in the company.
On top of that, J.C. Penney announced it had received a new $1.75 billion loan, which will be secured by company assets including its real estate, accounts receivable, inventory, and various intellectual properties. The debt, which will bear an interest rate around 6.5% and would come due in five years, will allow the company to complete store renovations and other projects.
While J.C. Penney desperately needed cash, highlighted by the fact that the company’s cash holdings fell by more than a half-billion dollars as of February from the year prior, the retailer’s core problems remain intact.
The company’s sales and profits have collapsed over the past year, largely the result of initiatives brought on by former Chief Executive Officer Ron Johnson, including the decision to eliminate discounts in favor of a regular low-pricing strategy that inevitably backfired.
J.C. Penney’s shares jumped to their highest level since February on news of the cash infusions, but all the capital in the world doesn’t mean much if the company cannot reverse the $985 million net loss it reported in fiscal 2012.
There are better clothing retailers out there
One retailer executing extremely well is TJX Companies (NYSE: TJX). The operator of TJ Maxx and Marshall’s stores is already up nearly 15% since the start of 2013. Indeed, the company’s performance has been as impressive as its stock price rally. In February, the company reported spectacular adjusted earnings per share growth of 28% for full-year 2012, on the strength of a 12% rise in sales.
Not only has TJX’s stock soared over the past few years, but the company continues to consistently reward shareholders. When the company last reported earnings, it announced a new share buyback program. TJX revealed its plan to repurchase approximately $1.3 billion to $1.4 billion of its own stock during the current fiscal year, after repurchasing a total of $1.3 billion last year.
To further demonstrate its commitment to its loyal shareholders, TJX also intends to increase the regular quarterly dividend on its common stock to $.145 per share, or $.58 annually. This represents a 26% increase to the current dividend and marks the 17th consecutive year that TJX has raised its dividend. Over this period of time, the company’s dividend has grown at a superb compound annual rate of 23%.
The Foolish bottom line
J.C. Penney has a new CEO, billions in new cash, and counts one of the world’s most famous investors among its backers. However, deep fundamental problems surrounding the company still exist. While investors should celebrate the recent stock price rally, it remains to be seen whether these new funds can translate into renewed profitability.
J.C. Penney no longer pays a dividend, whereas TJX is firing on all cylinders. TJX recently reported gangbusters growth in sales and profits, increased its common stock dividend, and is using some of its solid cash generation to buy back shares. Investors don’t need to gamble on whether J.C. Penney can turn itself around: there are other profitable clothing retailers, like TJX, that should be on your watch list instead.
J.C. Penney’s stock cratered under Ron Johnson’s leadership, but could new CEO Mike Ullman present the opportunity investors have been waiting for? If you're wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof. Simply click here now for instant access.
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