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How to Play the Comeback of JC Penney

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JC Penney continues to plan for future growth despite the 16.6% drop of first-quarter sales.

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JC Penney (NYSE:JCP) is coming back strong since the dismissal of CEO Ron Johnson last month. With an apologetic return, the new management has promised to reach out and bring back consumers through a series of promotions and discounts. This has proven to be an effective method used by returning CEO Mike Ullman, who has driven Penney's stock up 32% since he took over. This is only a taste of what's to come if Penney's new management plays its cards right.

JC Penney continues to plan for future growth despite the 16.6% drop of first-quarter sales reported on May 7. On May 14, management made a pitch to lenders to get an extra $1.75 billion loan, suggesting it will continue to burn through cash in an attempt to aggressively expand its operations. These levels are expected to return to normal once the launch of its home departments in over 500 stores comes to a close. In spite of the spending, the company reported a cash balance that would suggest it has used up a lot less cash than originally expected, which sent its stock up 13%.

The reported drop in earnings is attributed to both the construction costs associated with the additions of the home departments mentioned above, as well as previous marketing and pricing strategies, which were executed under Johnson. Ullman has demonstrated that he is prepared to hit the ground running, already reversing some of these ineffective approaches -- most notably, bringing back it's lucrative private label St. John's Bay apparel line which was generating more than $1 billion in sales before Johnson decided to discontinue it last year.

Depending on how investors react to these reports, one can expect stocks to drop in the short run, signaling an opportunity to buy. The board expresses full confidence in JC Penney under Ullman, saying that he has a "proven track record in turnarounds." If that is indeed the case, and Ullman's pricing overhaul works, then we can expect positive sales in 2Q/13.

The Trade: Buying the JCP May 19-20 Bull Call Spread for $.33
Risk: $33 per 1 lot
Reward: $67 per 1 lot
Breakeven: $19.33

Greeks of the Trade:

Delta: Long
Gamma: Long
Theta: Short
Vega: Long
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No positions in stocks mentioned.
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