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5 Things Investors Need to Know About J.C. Penney's Turnaround

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5 Things Investors Need to Know About J.C. Penney's Turnaround By Sean O’Reilly


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1. J.C. Penney Got Itself Into Trouble Trouble began in 2011 when Ron Johnson, creator of the Apple Store, was brought in as CEO to revamp the brand by activist investor Bill Ackman Hiring Johnson was an attempt to bring the 100 year-old department store into the 21st century However, rebranding efforts alienated customers


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1. J.C. Penney Got Itself Into Trouble Cont. Revenue fell 33.2% to $11.86 billion from FY 2011 through FY 2014 Profits over this period swung from $389 million to ($1.4) billion Situation became so desperate that the company had to raise capital via a share offering in October 2013


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2. Former CEO Came to the Rescue In April 2013, Myron “Mike” Ullman, Ron Johnson’s predecessor, came out of retirement and took the helm Whereas Johnson sought to change the retailer’s DNA, Ullman focused on the basics Over 90 store closures were announced Eliminated practically all of Johnson’s initiatives


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3. Gross Margins Have Bounced Back


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3. Gross Margins Have Bounced Back Cont. Gross margins bottomed out in the quarter ended February 2, 2014 at 23.8% Largely the result of inventory markdowns on merchandise accumulated during Johnsons’ tenure Highest gross margins generated by JCP were in FY 2010 at 39.4% This is important, because JCP is attracting customers back without drastic markdowns


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4. Customers Are Slowly Coming Back Same-store sales growth in current fiscal year has been robust Q1 growth of 7.4% Q2 growth of 6.0% Q3 growth of 6.4% Company expects to be free cash flow neutral this year


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5. Full Recovery Is Years Away Despite performance this year, JCP isn’t out of the woods yet Sales are still well below their peak:


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5. Full Recovery Is Years Away Cont. JCP still loses money on a GAAP basis Analysts estimate it will take until the end of this decade for sales to recover at current rates


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Foolish bottom line Thanks to the return of CEO Myron “Mike” Ullman, J.C. Penney has managed to stop the hemorrhaging JCP expects to be free cash flow neutral in current fiscal year Company generating strong same-store sales growth Full recovery, if it happens, will take at least another three to four years


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