JC Penney Company (JCP) Breaks Even in Q4, Shares Down - Analyst Blog

J. C. Penney Company Inc. (JCP) posted breakeven results which were nowhere close to the Zacks Consensus Estimate of earnings of 14 cents per share, thus sending the shares down 12.7% during the after-market trading hours yesterday. However, it fared much better against adjusted loss of 68 cents reported in the prior-year quarter, yet failed to please investors’ who seem to feel the company is still bearing the brunt of Ron Johnson’s botched transformation plan.

Including one-time items, quarterly loss was 19 cents per share, compared with earnings of 11 cents per share in the year-ago period.

However, revenues of $3,893 million came ahead of the Zacks Consensus Estimate of $3,879 million and grew 2.9% year over year. Moreover, comparable-store sales (comps) increased 4.4% compared with 1.4% growth in the year-ago quarter. This was above the company’s own guided range. In January, buoyed by strong holiday comps data, management had projected fourth-quarter fiscal 2014 comps  at the higher end of its original guidance of 2% to 4%.

Coming back to earnings, Home, Men’s Apparel and Fine Jewelry were the best performing categories. Performance of Sephora stores was also commendable. Regionally, sales improved all over, especially in the western and central regions of the country. During the quarter, online sales grew 12.5% to $428 million.

Gross profit during the quarter surged 22.3% to $1,314 million, whereas gross margin expanded 540 basis points to 33.8% due to improved margin on clearance sales as well as favorable product mix. The company at its last earnings release had anticipated gross margin to increase 500-600 bps year over year in the quarter under review.

Further, the company’s selling, general and administrative (SG&A) expenses increased 2.8% to $1,032 million. As a percentage of sales, SG&A was unchanged at 26.5%.

J. C. Penney’s operating income of $63 million significantly improved from a loss of $138 million in the year-ago period. Adjusted EBITDA improved to $262 million from $52 million in the prior-year quarter.

Other Financial Details

J. C. Penney, which competes with Macy's, Inc. (M), Kohl's Corp. (KSS) and Nordstrom Inc. (JWN), ended the quarter with cash and cash equivalents of $1,318 million, long-term debt of $5,322 million and shareholders’ equity of $1,914 million. Merchandise inventory levels are down 9.6% to $2,652 million.

Moreover, the company generated free cash flow of $645 million in the said quarter, a remarkable improvement from a free cash flow of $246 million recorded in the prior-year quarter. For the fiscal, free cash flow was $57 million as against negative cash flow of $2,746 million in fiscal 2013.

The company incurred capital expenditures of $50 million in the quarter, taking the yearly total to $252 million.   

Guidance

For fiscal 2015, management expects comps to increase in the band of 3%–5% as against 4.4% increase in fiscal 2014. SG&A expenses are expected to decrease by $50—$100 million year over year.

Gross margin is projected to improve 50-100 bps in fiscal 2015. The company expects free cash flow generation to be even with fiscal 2014.

Management of this Zacks Rank #2 (Buy) company remains confident of improving its bottom-line performance, supported by its robust private and national brands, compelling prices and unique collection. Also, with its turnaround strategy underway, the company aims to become a leading department store retailer. Though the company is headed in the right direction, we continue to believe it will be a time consuming affair.

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