How Will This Court Ruling Affect J.C. Penney (JCP) Stock?

Tickers in this article: JCP M MSO

NEW YORK (TheStreet) -- A New York state judge ruled that J.C. Penney  interfered with a contract between Macy's and Martha Stewart Living  when it signed a contract to sell Martha Stewart branded products in 2011.

New York State Judge Jeffrey K. Oing ruled that Martha Stewart Living had breached its exclusive contract with Macy's when it sold a 17% stake in its business to J.C. Penney three years ago for $38.5 million.

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Macy's sued Martha Stewart Living a month later, claiming that that it had exclusive rights to sell its products due to a 2006 agreement between the two companies. 

Oing also ruled that Macy's did not prove that it should receive punitive damages despite the breach of contract.

J.C. Penney announced that it was scaling back its agreement with Martha Stewart in October and only selling products that fell outside of the scope of the Macy's/Martha Stewart agreement. 

TheStreet Ratings team rates PENNEY (J C) CO as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate PENNEY (J C) CO (JCP) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally high debt management risk, disappointing return on equity, poor profit margins, generally disappointing historical performance in the stock itself and deteriorating net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The debt-to-equity ratio is very high at 2.03 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Multiline Retail industry and the overall market, PENNEY (J C) CO's return on equity significantly trails that of both the industry average and the S&P 500.
  • The gross profit margin for PENNEY (J C) CO is currently lower than what is desirable, coming in at 33.06%. Regardless of JCP's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, JCP's net profit margin of -12.56% significantly underperformed when compared to the industry average.
  • JCP's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 52.48%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The change in net income from the same quarter one year ago has exceeded that of the Multiline Retail industry average, but is less than that of the S&P 500. The net income has decreased by 1.1% when compared to the same quarter one year ago, dropping from -$348.00 million to -$352.00 million.
  • You can view the full analysis from the report here: JCP Ratings Report
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