J.C. Penney Is Expecting a Killer Second Half

By Markets Fool.com

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Last week was a banner one for retail stocks, andJ.C. Penney(NYSE: JCP) was no exception. In the three sessions from August 10 to August 15, the stock rose 23%, gaining as peers likeMacy's(NYSE: M),Nordstrom, andKohl'sbested expectationsand J.C. Penney itself topped estimates, posting a per-share loss of $0.05 against the consensus of $0.15.

Same-store sales ticked up 2.2%, but more important was management's decision to maintain its guidance for the full year, signaling an especially strong second half. Penney continues to expect comparable sales growth of 3-4% for the year, EBITDA of $1 billion, and positive earnings per share.

The most bullish part of that prediction may be the comparable sales forecast. Through the first half of the year, same-store sales were up just 0.9%, meaning the company is forecasting comps of 5-7% in the back half of the year, an unusually strong clip in today's retail improve. Earnings-based measurements are also expected to accelerate, but that is normal as the holiday period is the strongest for retailers.

On the recent earnings call, management outlined several initiatives it's undertaking to get to that goal.

Sephora is stylin'

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One long-standing winner for the company, despite its tumultuous period under Ron Johnson, is Sephora, the cosmetics company that operates in more than half of the company's department stores. Sephora began opening locations inside J.C. Penney ten years ago,and management has been encouraged by recent results. CEO Marvin Ellison said Sephora was among the company's top-performing categories, along with footwear, handbags, and home.

Thus far this year, Penney has opened 56 new Sephora locations, increasing the total number by more than 10% to 574, and it expects to open four more in the fall. Recent Sephora openings have come at smaller and more rural Penney stores where the company had previously been reluctant to add Sephoras, but Ellison said that new locations have "generated the best Grand Opening results we've ever seen."

Those results have led management to believe it can open more Sephora shops than it previously thought, and it will also begin adding Clinique, the country's leading skin-care brand, to Sephora shops later this year.

Moving into big-ticket items

Perhaps J.C. Penney's boldest move this year was reintroducing appliances to stores for the first time in more than 30 years. The decision came as rivalSears(NASDAQ: SHLD), a major appliance seller, has faded, and as customers have been increasingly searching Penney's website for things like refrigerators, dishwashers, and ranges.

The company plans to launch appliances in more than 500 stores this year, and has already opened 200 showrooms so far. Considering the American appliance market is expected to be $50 billion by 2020,this is a huge opportunity for J.C. Penney, and its store footprint and ability to take sales from Sears should give it sizable market share.

Ellison said the pilot test was "very successful" and that over a third of customers who came in to buy appliances were new to J.C. Penney.Additionally, the category offers a financial benefit, as the company doesn't own the inventory until it sells it. With appliances ramping up to more than 500 stores in the fall, management has said it will be a significant contributor to comparable sales growth in the second half of the year.

Taking advantage of rival store closures

Finally, Macy's announcement earlier this month that it would close 100 stores should present an additional tailwind for the company. Ellison acknowledged on the call that when Sears or Macy's closes stores in a mall it occupies, it's a net positive for Penney.More closings are expected from Sears, which should drive more sales toward J.C. Penney.

Ellison noted that Penney shares 400 malls with Sears, and sees appliances as an area where the company can grab market share.

J.C. Penney is also working on other initiatives, including in e-commerce, where it's updated its mobile app and introduced a buy-online/pick-up in store option, which has been successful and encouraged further in-store shopping. In the store, it's rolled out a plus-sized private label line called Boutique+ and introduced Ashley's Furniture.

It's still early in Penney's comeback, and the company's initiatives should begin yielding results in the back half of the year. At analyst day this week, the company told analysts it could reach EPS of $1.55 by 2019 and add between $1.2 and $1.7 billion in sales by that year. In the fast-changing retail world, such predictions can be risky -- but for now, the momentum is clearly moving in the right direction. Expect a strong second half from the once-forgotten department store chain.

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Jeremy Bowman owns shares of J.C. Penney. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.