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JC Penney (JCP) Tanks After Q1 Earnings, Follows Retail Suit

Zacks Equity Research

Of late retail giants like Macy's, Inc. M, Kohl's Corporation KSS, Nordstrom, Inc. JWN and Dillard's, Inc. DDS have witnessed sharp decline in share price as these retailers failed to impress investors with their quarterly numbers. The story turned out same for J. C. Penney Company, Inc. JCP, as it reported fiscal first-quarter 2017, following which its stock plunged 14%. In fact, the stock has witnessed a decline of 50.4% in the past six months, wider than the Zacks categorized Retail-Regional Departmental Stores industry’s slump of 40.2%.

Let’s Unveil the Picture

J. C. Penney posted adjusted earnings of 6 cents compared with Zacks Consensus Estimate of a loss of 22 cents. In the prior-year quarter, the company had reported adjusted loss of 32 cents. However, on a GAAP basis, the company delivered net loss of $180 million or 58 cents, wider than the net loss of $68 million or 22 cents reported in the year-ago quarter.  The company not only reported widening net loss but also dismal comparable sales and revenues.

The company’s total net sales of $2,706 million missed the Zacks Consensus Estimate of $2,758 million and declined 3.7% year over year, after witnessing a decrease of 0.9% in the preceding quarter. Further, weakness in apparel continues to affect the company’s overall sales. Notably, J. C. Penney’s sales have missed the estimate for the fifth consecutive quarter. Comparable-store sales (comps) decreased 3.5%, compared with a decline of 0.4% in the prior-year quarter.

The company’s results were negatively impacted by dismal sales at brick-and-mortar stores during February and increase in costs due to store closures as well as employee severance packages.

Sturdy performance was witnessed across Sephora, Home, Salon and Fine Jewelry divisions. Management remains optimistic about roll out of appliances, new Sephora locations, center core refreshes, in-store.com fulfillment and buy online, pick up in store same day initiative.

Gross profit in the quarter decreased 3.4% to $983 million, while gross margin expanded 10 basis points (bps) to 36.3%. J. C. Penney’s adjusted EBITDA improved to $255 million from $153 million in the prior-year quarter, while adjusted EBITDA margin increased 400 bps to 9.4%.

J.C. Penney Company, Inc. Holding Company Price, Consensus and EPS Surprise


J.C. Penney Company, Inc. Holding Company Price, Consensus and EPS Surprise | J.C. Penney Company, Inc. Holding Company Quote

Strategic Initiatives

In an effort, to achieve sustainable growth J. C. Penney had earlier announced strategic initiatives, wherein it shut down 138 stores and is further planning to close two distribution centers. These strategic efforts will not only help the company to align its brick-and-mortar presence but will also help it utilize capital resources in locations where it has ample opportunity.

The closure of stores, which represents nearly 13–14% of the company’s store portfolio, is likely to hurt total annual sales by 5%. Further, EBITDA will come down by less than 2% but most importantly it will not affect net income.

These stores were not only reporting dismal comps in comparison with the remaining store base but were also being operated at higher cost. The company anticipates annual saving of nearly $200 million from the store closure program.

Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $363 million, long-term debt of $4,066 million and shareholders’ equity of $1,205 million. Merchandise inventory levels increased 0.8% to $2,949 million.

Moreover, in the reported quarter, the company used $293 million of free cash flow compared with $421 million used in the prior-year quarter. Further, it incurred capital expenditures of $83 million in the quarter, up from $39 million in the year-ago quarter.

2017 Outlook

Management reiterated fiscal 2017 guidance. The company expects comps to be in the range of down 1% to up 1%, while gross margin is projected to expand between 20 bps and 40 bps compared with fiscal 2016. Adjusted earnings per share are estimated to be in the range of 40–65 cents. The Zacks Consensus Estimate for fiscal 2017 is currently pegged at 49 cents.

Moreover, the company expects to generate free cash flow between $300 million and $400 million in fiscal 2017. Inventory is projected to decline by 5% or above in comparison with fiscal 2016.

At present, J. C. Penney carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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