How Far Away Is J.C. Penney From Returning to Its Glory Days?

It was just two years ago that J.C. Penney (JCPN.Q) was being left for dead by not only investors, but shoppers as well. Things got so bleak, in fact, that the company had to issue over 96 million shares of its stock in order to ensure it would have the working capital necessary for the 2013 holiday season.

Now, heading into the 2015 holiday season, things are looking up for the department store operator. The company is fresh off a strong third-quarter performance, which included the back-to-school shopping season, where it generated strong same-store sales results of 5% and narrowed its quarterly loss. Few today believe the discount retailer's demise is imminent, but as we shall soon see, it's going to take more than a few more quarters to get J.C. Penney back to its glory days. 

How much sales growth will it take?
It's obvious, even for the most optimistic, that the days of store openings and physical expansion are probably over for Penney and its peers. Even Macy's (M -1.03%), which has been outperforming J.C. Penney, both operationally and financially, soundly over the past five years, is closing unprofitable locations as it shifts to a mix between physical stores and online sales.

Thus, in order to carve a place for itself, J.C. Penney will need to figure out a way to bring customers back to its remaining locations. Sales last peaked out in FY 2011, a year that netted the company $17.759 billion in sales. That year, the company had an average store count of 1,107. Simple math nets us an average revenue per store of $16,042,457. Some stores did better, some did worse; remember we're only concerned with the average. Since 2011, Penney has closed more than a few stores and plans to close more still. At the end of the most recent quarter ended October 31, 2015, its store count stood at 1,020. This is where things get a little tricky.

We are about to head into the crucial fourth quarter and J.C. Penney, like many a retailer, makes its money during the holiday season. We obviously don't know how the retailer will perform, but we do know what management has projected for the full year. In its third-quarter press release, management noted that full-year same-store sales growth will fall somewhere between 4% and 5%, which yields total sales of around $12.65 billion. What does this mean for the average store? It isn't pretty. Total sales of $12.65 billion across the average store count for the last year of 1,041 (there were 1,065 stores at the end of FY 2015) gives us a ballpark sales per store for FY 2016 of...drum-roll please...$12.15 million.

Sounds rough, right? It won't be easy, but it is possible for J.C. Penney's sales to get back where they need to be. Investors are just going to have to be patient. 

Turnarounds take time
True, sales at J.C. Penney are some 25% below where they need to be. However, the company has already accomplished a monumental feat: bringing a decent portion of lost customers back through its doors. Same-store sales growth has averaged 6.6% so far this fiscal year and, if Penney's latest conference call is any indication, things look good going into the holiday season. 

How long will it take for Penney to get back to a semblance of where it once was? This, of course, depends on future same-store sales growth rates -- which we cannot know for sure. On top of this, the company will not be aided by the fact that its recent success has been off a low base -- the low-hanging fruit (customers) is probably gone now. Nevertheless, and despite the obvious difficulties, it isn't impossible for the company to pull this off:

Source: Author calculations.

In defining "recovery," I used $16.04 million in sales per store as the target. This is actually higher than it needs to be, as it would equate to total sales of over $16 billion. As I recently noted, Wall Street analysts think Penney could generate earnings per share of $1.70 on total sales of just $14.49 billion by fiscal year 2020. If true, this would require annual same-store sales growth of just 3.16%. Thanks to store-within-a-store partnerships like the one J.C. Penney has with LVMH Moet Hennesey (NASDAQOTH: LVMUY)-owned Sephora, and J.C. Penney's renewed focus on the customer, achieving same-store sales growth of 3% doesn't sound so far-fetched. 

Recovery for Penney may be a number of years away, but it's not impossible. Another positive, touched upon in a previous article, is that the battered and bruised department store retailer has already managed to get gross margins back to where they need to be. Now all that remains is to get customers back in the door -- slowly but surely.