A month has gone by since the last earnings report for J.C. Penney (JCP). Shares have added about 66.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Penney due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
J. C. Penney Reports Loss in Q2
J. C. Penney reported second-quarter fiscal 2019 results, wherein the company reported narrower-than-expected loss. However, sales missed the consensus mark. This marks the second consecutive quarter of top-line miss for the company. The quarterly performance was adversely impacted by dismal comps and weakness in certain business categories. We note that the company’s top line has persistently declined year over year for a while.
Nevertheless, lower-than-anticipated loss, reduced cost of goods sold and SG&A expenses were some of the upsides in the quarter. In a separate release, the company announced merger with thredUP — a renowned second-hand online consignment store.
The company posted adjusted loss of 18 cents, narrower than the loss of 38 cents reported in the year-ago quarter. Moreover, the figure compared favorably with the Zacks Consensus Estimate of a loss of 32 cents.
Total revenues (including total net sales and credit income and other) in the quarter came in at $2,619 million, which declined 7.4% from the prior-year quarter’s figure and missed the Zacks Consensus Estimate of $2,683 million.
Total net sales of $2,509 million fell 9.2% year over year. Soft comparable sales (comps) were a deterrent. Moreover, sales were adversely impacted by sluggishness witnessed in home, women's accessories as well as boy's and girl's apparel categories. Nevertheless, fine jewelry, women's apparel, footwear and men's apparel categories performed well. Further, credit income and others totaled $110 million, up 64.2% on a year-over-year basis on gains from the company credit portfolio.
Comps during the quarter declined 9% year over year. This can be attributed to the company’s exit from major appliance and in-store furniture categories, which took a toll on comps to the tune of 300 basis points (bps). These exits were carried out as part of the company’s turnaround initiatives to focus on profitable areas. Excluding these exits, comps registered a decline of 6% owing to lower transactions.
Cost of goods sold (excluding depreciation and amortization) was $1,585 million, down 13.4% decline from the prior-year quarter’s tally. As a rate of sales, the metric declined 310 bps, courtesy of lower markdowns, improved shrink rates as well as margin gains from stores and online sales. Moreover, exits from major appliance and in-store furniture businesses also aided cost reduction.
Gross margin (on the basis of total revenues and the above-mentioned cost of goods sold) improved roughly 420 bps. Improved shrink rates and other efficiency building efforts aided gross margin performance in the quarter. Adjusted EBITDA improved 52.4% to $160 million, while adjusted EBITDA margin (based on total revenues) improved 240 bps to 6.1%.
SG&A expenses decline 1.1% to $870 million, driven by lower store and advertisement expenses. As percent of sales, SG&A expenses expanded 280 bps to 34.7%.
Other Financial Details
J. C. Penney ended the quarter with cash and cash equivalents of $175 million compared with $182 million in the year-ago quarter. Meanwhile, long-term debt came in at $3,589 million, down 9.4% from the year-ago quarter’s tally. Shareholders’ equity totaled $963 million at the end of the quarter. Merchandise inventory levels declined 12.5% to $2,471 million.
The company used free cash flow of $133 million during the first six months of fiscal 2019. Further, during this period it incurred capital expenditures of $146 million.
For fiscal 2019, management expects comps to decline in the range of 7-8% compared with the prior-year figure. Excluding the impacts of exit from major appliance and in-store furniture categories, comps are anticipated to decline in the range of 5-6%. Cost of goods sold (as a percentage of net sales) is likely to fall 150-200 bps. Adjusted EBITDA is expected in the range of $440-$475 million. Additionally, management continues to expect positive free cash flow for the fiscal.
We note that the company had received a notification from the NYSE with respect to its listing status. The company has been trading below the minimum requirement of $1 for a while. This exposes it to the risk of being delisted. Nevertheless, management highlighted that it is undertaking efforts in its operating front to improve performance and boost share price.
In context of improving operations, management highlighted that it is on track with strengthening internal operations, developing better connectivity with customers and improving omnichannel strategies. Further, the company is striving toward building efficiency through cost reduction, improving the inventory position as well as reducing shrink levels. It is also focusing on curtailing debt load.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -18.3% due to these changes.
Currently, Penney has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Penney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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