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J.C. Penney just cannot catch a break these days. Even when the department store chainsurprised analysts last week by "accidentally" releasing better than expected comparable sales, Wall Street attributed the boon to an early Easter in the first quarter and reaffirmed bearish price targets (as low as $3 per share) for the stock.
The market apparently agrees: Despite the fact comps are likely to come in 4.5% higher for the full quarter -- well above the 3.1% forecast -- shares have fallen nearly 9% since the announcement.
That lowball number one analyst placed on the stock, however, suggests the retailer has a lot of froth holding it up, so it is worth looking at what could send shares tumbling.
The easy money has been made
There is little doubt J.C. Penney has made a remarkable comeback -- shares were up 45% year-to-date before pulling back, though the bar was set pretty low.
After nearly succumbing to the disastrous changes former CEO Ron Johnson wrought in his quixotic campaign to reimagine what an old retailer could be, all J.C. Penney essentially had to do after his departurewas show a pulse to record a gain. But it did more that just breathe, it scored some respectable increases in comparable sales, leading to a 3.4% increase in net sales last year to $12.3 billion.
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Sales are rebounding but in a rather uneven fashion. Source: SEC filings
Without a dismal 2013 to aid comps, analysts believe a strong performance in 2015 will be hard to repeat. Without tailwinds like an early Easter driving the rest of the year, notching additional gains should only get harder.
Traffic does not turn positive
Even while recording higher sales, store traffic remains lower. While the numbers continued improving in the fourth quarter, they are still down from historical levels. Until the retailer can drive more customers to its stores, the recovery is going to remain in doubt.
Management has focused significant attention on store-in-store cosmetics retailer Sephora to drive traffic and sales elsewhere in the store, similar to its fine jewelry department. Both of these are core to the future of the company, but J.C. Penney needs similar growth from footwear, handbags, kids, and the home department.
The online business is doing well, particularly in the home department, but management sees in-store sales as the biggest opportunity for gains.
The kitchen sink
This is the place where all the little issues and minor annoyances add up to one big potential problem.
J.C. Penney has taken on a lot of debt, with over $5 billion on the balance sheet amounting to more than $400 million in annual interest payments. It is operating within very narrow tolerances that leave little room for missteps -- any revenue shortfalls from a slowing economy, heightened competition, or an internal error will dash its turnaround plans.
The company obviously cannot keep running losses, so last year, J.C. Penneylaid out a programto return to profitability by boosting sales some $3.5 billion by 2017.Almost three-quarters of that is to come from new sales growth, while another $1 billion dollars will come from market share gains.
It is good to have a plan, but competitors likeMacy'sand Kohl'sare not going to just stand around and watch J.C. Penney take their market share. This growth will have to be more robust than it has been, which is partially why the markets reacted as they did to the numbers leaked last weak.
J.C. Penney fell $771 million short of making a profit last year, and though that cut the losses in half compared to the prior year, sales growth needs to accelerate to close that gap quickly.
Home is where is the heart is, and where J.C. Penney's next growth spurt could come from. Source: J.C. Penney
Tied up in knots
The retailer is making significant progress on its turnaround, but rarely do these plans go as smoothly or in as straight a line as investor presentations suggest. This is why so many people see J.C. Penney stock as a risky, speculative play.
With the company moving in the right direction and management making the necessary difficult choices, I believe the risk is commensurate with the reward if management succeeds. But it is wise for any investor to keep those risks in mind when evaluating the company. An investment like J.C. Penney needs to be watched carefully to ensure it is executing well on plans. Otherwise, the gains made year-to-date will have been for naught, and shares could quickly come tumbling down.
The article 3 Reasons JC Penney Company Inc Stock Could Fall originally appeared on Fool.com.
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