The Zacks Analyst Blog Highlights: J. C. Penney, Kohl's, Macy's, Novartis and Sanofi

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Jan 30, 2012, 09:30 ET

CHICAGO, Jan. 30, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include J. C. Penney Company Inc. (NYSE: JCP), Kohl's Corporation (NYSE: KSS), Macy's Inc (NYSE: M), Novartis (NYSE: NVS) and Sanofi (NYSE: SNY).

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Here are highlights from Friday's Analyst Blog:

Big, New Ideas from JC Penney

Radical ideas are flourishing at J. C. Penney Company Inc. (NYSE: JCP), a leading retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, as the company recently announced a string of strategic measures to enhance shareholder's value in the coming four years.

New pricing strategy, fresh logo, strategic merchandise initiatives, reduction in costs, enhancement of shopping experience and customers shopping at their own terms -- you name it, Ron Johnson's (Chief Executive Officer of the company) turnaround blueprint has it all. In short, the company is transforming the way it operates.

That being said, let's elaborate a bit more on the initiatives to get a clear picture of what is on the palate.

Pricing is the Key

Calling it 'Fair and Square,' jcpenney (the new way of referring it) came up with a new pricing strategy that is segmented into three types of prices – Everyday, Month-Long Values and Best Prices.

The new pricing strategy aimed at keeping the prices low, will also allow the company to introduce new merchandises regularly. Moreover, as an extra topping, jcpenney will come up with 12 unique and exciting monthly promotional events every year to provide better value to the shoppers.

Further, to enrich the shopping experience, jcpenney will introduce around 80 to 100 mini brand shops in its stores.

So Much in No Time

With a Herculean task at hand, the company is in no mood to waste any more time. The transformation activities are slated to start right from February 1, 2012, with the implementation of its fresh logo, new pricing strategy and monthly cadence.

Moreover, from August 2012, jcpenney will adopt month-by-month, shop-by-shop strategy to modernize all stores with latest and unique assortments. The company said that all the stores will undergo complete transformation by the end of 2015.

Self Funding for the Change

Shifting focus from stores to financials, jcpenney's COO Mike Kramer disclosed the long-term financial outlook. The company plans to fund the entire transformation activities through its cash from operations. To start with, the company will incur $800 million in capital expenditures in fiscal 2012 to enrich the shopping experience of buyers and to establish the company's new in-store shops.

Shaving off Costs

To lower the competitive pressures from its peers like Kohl's Corporation (NYSE: KSS) and Macy's Inc (NYSE: M), the company aims to reduce costs by $900 million in the first couple of years of its transformation, resulting in lowering the expenses below 30% of sales. Moreover, the company targets expenses to be 27% of sales by the end of the transformation process.

Speaking specifically, jcpenney will abridge significant amount of costs from stores and advertising and from operations at its home office.

Forecast Above Consensus

Management expects fiscal 2012 earnings to meet or exceed fiscal 2010 earnings per share of $2.16. The current Zacks Consensus Estimate for fiscal 2012 is $1.62 per share.

However, on a reported basis, including one-time items, jcpenney forecasts earnings of $1.59 per share.

Summing Up

Through its bold and strategic modifications, the company aims to simplify the operational structure, which will supplement it to generate positive earnings growth and boost shareholder's value.

Moreover, the transformation is expected to augment sales and enhance productivity at stores, which in-turn will lead to strong margin expansion.

The company will not come up with quarterly sales or earnings guidance, and will no longer provide monthly same store sales results.

Currently, J. C. Penney retains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the company's fundamentals, we have a long-term Neutral recommendation.

Novartis Beats by a Penny, View Guarded

Swiss pharmaceutical giant Novartis (NYSE: NVS) reported earnings per share of $1.23 for the fourth quarter of 2011, marginally beating the Zacks Consensus Estimate of $1.22. Earnings were also above the prior-year figure of $1.14 per share. An unimpressive top-line was countered by higher adjusted operating income resulting in the nominal beat.

Reported earnings were only $0.49, down 48% year over year, due to huge exceptional and one-time charges of $1.5 billion in the quarter. The exceptional charges related primarily to the Tekturna/Rasilez sales decline, discontinuation of some pipeline candidates and temporary suspension of production at the Lincoln, Nebraska facility.

Fourth quarter revenues of $14.8 billion fell short of the Zacks Consensus Estimate of $15.0 billion mainly due to poor performance of the Sandoz and Consumer Health segments. Foreign exchange further affected fourth quarter revenue by 1%. Revenues were however ahead of $14.2 billion recorded in the year-ago period.

For the full year 2011, Novartis announced earnings of $5.57 per share, slightly below the Zacks Consensus Estimate of $5.63. Revenues were $58.6 billion, minimally below the Zacks Consensus Estimate of $58.8 billion. Revenues, however, grew 16% and earnings were up 8% over the prior year.

Last year, Novartis completed the merger with Alcon following which Alcon became the second largest division within Novartis. The Alcon Division recorded revenue of $2.4 billion in the quarter, representing a pro-forma growth of 6% driven by strong growth of ophthalmic pharmaceuticals and surgical products.

Sandoz, Novartis' generic arm, recorded a sales decline of 5% to $2.3 billion as growth from volume expansion was offset by price erosion. Moreover, the generic version of Sanofi's (NYSE: SNY) Lovenox was down year over year, which significantly impacted Sandoz' US retail generics and biosimilars growth. Softer pricing resulting from increased competition affected generic Lovenox sales. The volume growth was driven by strong performances in France, Spain, Russia, Italy and Japan as well as from biosimilars.

Sales at the Vaccines and Diagnostics division grew 86% over the year-ago quarter to $671 million. Strong performance of meningococcal vaccines (particularly Menveo), brisk diagnostics sales and resolution of shipment delays (which affected prior quarters) drove the upsurge. One time revenue from pre-pandemic flu vaccine also boosted sales in the quarter.

Consumer Health sales were down 7% over the prior year to $1.1 billion due to weakness in sales of over-the-counter (OTC) products. In early January 2012, Novartis issued a voluntary recall for certain OTC products in the United States, following the temporary suspension of operations from its Lincoln, Nebraska facility which affected OTC sales. The Animal Health division however did well in the quarter.

2012 Guidance

Novartis expects 2012 total constant currency sales to be in line with 2011 levels. The newly launched products are expected to make up for Diovan generic erosion, decline in Tekturna/Rasilez sales, price erosion and ongoing issues at the Lincoln plant. The Lincoln plant would resume shipments in mid-2012. Management expects to lose about $1.2 billion in Diovan sales in 2012. This combined with the Femara patent expiration will affect Pharmaceuticals revenue by about $2.6 billion. Moreover, Tekturna/ Rasilez sales are forecast to be reduced to half of what they are in 2011.

Novartis estimates a year-over-year decline in core operating margins (in constant currencies) in 2012 due to pricing pressure, generic competition and the suspension of operations at Lincoln.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #3 Rank ("Hold" rating) in the short run. Though pleased with Novartis' wide range of products and its business diversity, we prefer to remain on the sidelines in the long term due to the imminent patent cliff faced by the company.

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