Short Sellers Lighten Up on JC Penney

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J.C. Penney Co. Inc. (NYSE: JCP) is often tagged as a candidate for reorganization early next year, if its sales go as badly as expected. Its share price is down an extraordinary 62% this year to $3.20. However, recently, short sellers have lightened up on the stock, perhaps a sign that they do not expect the shares to fall further. The short interest in J.C. Penney dropped 17 million shares to 134 million in the period that ended November 30.

It is worth noting that the short interest is still 46% of its float, a tremendously high level. The change in short interest, therefore, may be a minor adjustment, although any improvement is a surprise. Very few investors were happy with the company’s recent guidance:

The Company’s fiscal 2017 full year guidance is as follows:

Comparable store sales: expected to be -1.0 % to 0.0 %;
Cost of goods sold: expected to be up 100 to 120 basis points versus 2016;
SG&A dollars: expected to be down 1.0 to 2.0 % versus 2016;
Adjusted earnings per share: expected to be $0.02 to $0.08; and
Free cash flow: expected to be $200 million to $300 million.

So, is the change in the short interest meaningful? Not every traditional, mainline brick-and-mortar retailer will be decimated by the holiday. J.C. Penney management can make the argument that it has held its own in the past several quarters, particularly in a field that includes walking dead companies like the parent of Sears and Kmart.

If J.C. Penney makes it out of the other side of the holiday retail tunnel intact and with a balance sheet that can carry it through next year, its shares may pop above $5 a share. Short sellers who walked away from the stock will have made a wise decision.