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J. C. Penney Misses, Profits Plunge

Zacks Equity Research

J. C. Penney Company Inc's (JCP) results have failed to meet expectations as the company reported dismal results consecutively, dashing hopes of a recovery, at least for the near term.

The retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishing, posted adjusted quarterly loss of 37 cents a share compared with earnings of 19 cents in the year-ago quarter. The Zacks Consensus Estimate for the quarter was of a loss of 24 cents.

Following disappointing quarterly results, the company stated that it will not meet its earlier guidance of $2.16 a share for fiscal 2012, excluding markdowns, restructuring charges and non-cash qualified pension expense.

On a reported basis, including one-time items, quarterly loss came in at 67 cents compared with earnings of 7 cents in the prior-year quarter.

Quarterly sales of $3,022 million marked a sharp decline of 22.6% from the prior-year quarter, and fell short of the Zacks Consensus Estimate of $3,172 million. Total sales were adversely affected by the discontinuation of the catalog outlet business. Internet sales via jcp.com slumped 32.6% to $220 million in the quarter.

Comparable-store sales declined 21.7% during the quarter compared with an increase of 1.5% in the prior-year period, reflecting lower marketing activities. The company needs to be more vocal regarding its pricing mechanism and better align its marketing efforts to attract buyers.

Adjusted gross profit slipped 26.1% to $1,106 million, whereas gross profit margin contracted 170 basis points to 36.6%, signifying lower sales and increased markdowns to clear inventory. The company posted adjusted operating loss of $74 million compared with an operating income of $125 million in the year-ago period.  

Other Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $888 million, total long-term debt of $2,901 million and shareholders’ equity of $3,671 million. The company incurred capital expenditures of $132 million and produced negative free cash flow of $207 million during the quarter.

Capital expenditures are expected to be approximately $800 million for fiscal 2012, in order to supplement the company's transformational efforts. Management also expects to generate more than $1 billion in cash during the year.

Management Sticks to Transition

J. C. Penney is in a transitory phase, trying to remould itself from the way it had operated before Ron Johnson took charge. In order to uplift itself, J. C. Penney announced an array of measures, which include new pricing strategy, fresh logo, strategic merchandise initiatives, cost reduction and enhancement of customers’ shopping experience, which in turn will augment store sales productivity, and lead to margin expansion and bottom-line growth.

The company aims to reduce costs by over $900 million by the end of fiscal 2012 given the operational efficiencies and sustained efforts to contain costs effectively.

J. C. Penney, which competes with Macy’s Inc. (M) and Kohl’s Corporation (KSS), currently operates approximately 1,100 department stores in the United States and Puerto Rico. Currently, we have a long-term Neutral recommendation on the stock. However, J. C. Penney holds a Zacks #5 Rank that translates into a short-term Strong Sell rating.

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