Option Trade 
J C Penney Company Inc (NYSE:JCP) Calls 
Thursday, 25 February, 2016

**OPTION TRADE: Buy the JCP May 2016 8.000 call (JCP160520C00008000) at approximately $0.65. Place a pre-determined sell at $1.30.

Note: No protective stop losses added -- but if you wish to do so make it $0.25.

by Ian Harvey

February 25, 2016

Discount retailer, J. C. Penney Company, Inc. (NYSE: JCP), is set to report fourth-quarter earnings tomorrow, 26th February, before the market opens, and is likely to report profit above analysts' average estimate.

Wall Street's fourth-quarter forecast for this department store operator calls for earnings per share (EPS) to have risen from breakeven in the year-ago period to $0.23, and revenue to come in at about $3.99 billion, which would be the highest quarterly revenue in the past two years. J.C. Penney posted $3.89 billion in revenue in the year-ago period.

Unlike its up-market rivals, the company reported strong sales in the holiday shopping months of November and December, helped by higher online sales and strong demand for the company's private-label offerings and gift products.

In the preceding quarter, the company had posted a positive earnings surprise of 9%. Notably, in three of the last four quarters the company surpassed the Consensus Estimate.

Looking ahead to next year, J.C. Penney's net loss is expected to slim once again, but analysts don't see it turning a full-year profit until 2017.

Management is confident that strategic endeavors such as deeper penetration of private brands, focus on omni-channel capabilities and expansion of Sephora stores will continue to fuel strong results.

The firm’s market capitalization is $2.36 billion. J C Penney Company Inc has a 1-year low of $6.00 and a 1-year high of $10.09. The company has a 50 day moving average of $7.20 and a 200 day moving average of $8.23.

Penney's is slowly putting its brand and business back together. First, under returning CEO Myron Ullman and now Marvin Ellison, the company has steadily chipped away at a net loss that reached nearly $2 billion in 2013.

J.C. Penney's same-store sales also turned positive in late 2013, and the company's performance has been improving since.

Looking ahead to 2016 will mark Marvin Ellison's first full year as Penney's CEO after taking the helm in August, and with it an opportunity to fully move past the doldrums of the Johnson era. In many ways, 2016 will be shaped by Ellison's strategy for the department store chain.

He plans to slow the pace of store closures, seeing an opportunity in physical real estate. Penney closed 40 stores this year and 33 the year before, but still has 1,020 in its fleet. That figure gives it a bigger footprint than rival Macy's, which is much larger in terms of sales and market value.

Penney's outposts in rural locations are its most profitable, having virtual monopolies, and that its network of stores is more valuable as it grows in the e-commerce market. Omnichannel has become a buzzword in retail, and keeping its real estate allows Penney to implement programs like ship-from-store and in-store pick-up.

Its partnership with Sephora is another way Penney is adapting to the future. It announced earlier this year that it would add 25 new Sephora locations in it stores, and would expect the program to continue to expand as it's been one of the rare positives for the retailer over the last few years.

Improving its technology is another area that Ellison plans to focus on. The company has "tons of data" but doesn't do anything with it, he said at a recent conference. Better use of that information could lead to improved inventory management, better customer relations, and lower prices from suppliers. Ultimately, it adds up to better, more profitable business.

Low-profile improvements like better use of its data trove should typify 2016 for J.C. Penney, as the big fixes that needed to be implemented following Johnson's departure have mostly been taken care of. J.C. Penney still has a long way to go toward returning to full health, but the company is clearly taking steps in the right direction.

J C Penney Company Inc (NYSE:JCP)‘s stock had its “buy” rating reiterated by analysts at Deutsche Bank in a note issued to investors last week.

Other analysts have also issued reports about the stock.

• B. Riley restated a “buy” rating and set a $12.50 target price on shares of J C Penney Company.

• OTR Global raised shares of J C Penney Company to a “neutral” rating.

• Finally, Citigroup Inc. raised shares of J C Penney Company from a “sell” rating to a “neutral” rating.

Three equities research analysts have rated the stock with a sell rating, eight have issued a hold rating, nine have assigned a buy rating and one has given a strong buy rating to the stock. The stock has an average rating of “Hold” and a consensus target price of $9.88.

Harvey’s Options Volatility Indicator

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the JCP May 2016 8.000 call (JCP160520C00008000) at approximately $0.65. Place a pre-determined sell at $1.30.

Note: No protective stop losses added -- but if you wish to do so make it $0.25.

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