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Why Is Penney (JCP) Down 2% Since Last Earnings Report?

Zacks Equity Research
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It has been about a month since the last earnings report for J.C. Penney (JCP). Shares have lost about 2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Penney due for a breakout? 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 catalysts.

J. C. Penney Surpasses Q4 Earnings, Sales Miss Estimate

J. C. Penney posted its fourth-quarter fiscal 2018 results, wherein the bottom line surpassed the Zacks Consensus Estimate, while the top line lagged the same. However, both the metrics declined year over year in the reported quarter.

The company didn’t provide any guidance for fiscal 2019, except that free cash flow is likely to be positive in fiscal 2019. Industry experts believe that the company, in order to win back customers, may focus on bringing in demand products even faster than its competitors. J. C. Penney announced plans to close stores that are not performing up to the mark and focus on core categories. 

Let’s Delve Deeper

The company posted adjusted earnings per share of 18 cents, reflecting a sharp decline from 51 cents in the year-ago quarter. However, the figure exceeded the Zacks Consensus Estimate of 15 cents.

Total revenues in the quarter came in at $3,786 million, which declined 8.4% from the prior-year quarter’s figure and lagged the Zacks Consensus Estimate of $3,836 million.  

Further, total sales of $3,665 million fell 9.5% year over year, due to soft performance in major appliances, furniture, and women's accessories and handbags categories. This led management to stop selling appliances, going forward. Also, it has decided to sell furniture only via jcp.com and in few Puerto Rico stores.

Region wise, South East and Gold Coast regions didn’t perform well, partly offset by improved performance in Midwest and Southwest regions. Looking at the monthly trend, sales in the month of November and December proved to be better, while January sales were the weakest.

We note that credit income and other totaled $121 million, up 44% on a year-over-year basis, driven by functional improvement in the portfolio for credit customer.

Comparable sales (comps) during the quarter went down 6%, against a rise of 2.6% in the year-ago quarter. On a shifted basis, comps declined 4%, owing to lower transactions, which were partly mitigated by rise in average unit retail.

Gross margin during the quarter contracted roughly 220 basis points (bps) on account of liquidation of slow moving and old inventory. Adjusted EBITDA declined to $266 million from $394 million in the year-ago quarter, while adjusted EBITDA margin as percentage of total sales fell 250 bps to nearly 7%.

SG&A expenses dipped 3.8% to $1,007 million in the quarter, backed by lower incentive compensation. However, SG&A expenses as percent of sales expanded 150 bps to 27.5%, owing to comps decline in the reported quarter.

Other Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $333 million compared with $458 million in the year-ago quarter. Meanwhile, long-term debt came in at $3,716 million, moderately down from $3,780 million in the year-ago period. Shareholders’ equity totaled $1,170 million at the end of the quarter. Merchandise inventory levels decreased 13.1% to $2,437 million.

The company generated free cash flow of $111 million for full year ending Feb 2, 2019, compared with $213 million in the prior-year period. Further, it incurred capital expenditures of $392 million during the fiscal year. The company anticipates capital expenditures of $300-$325 million for fiscal 2019.

Efforts to Achieve Turnaround

As part of its efforts to get back on track, the company plans to close 18 stores in fiscal 2019. Additionally, it will shut down 9 ancillary home and furniture stores. In doing so, the company will incur pretax cost of nearly $15 million related to this initiative during the first half of fiscal 2019.

This move comes after J. C. Penney noticed that comps at these stores were significantly low. Also, this step will help the company allocate capital resources in profitable businesses. Moving on, the employees affected by this store closure initiative will be compensated with separation benefits, including job assistance.

Apart from these, management is making efforts to boost growth in its women’s apparel, active apparel, special sized apparel and fine jewelry. The company is focused on eliminating product categories with dismal margins and significantly lowering unsold inventory.

Also, J. C. Penney plans to utilize advanced technology tools, which will help store associates improve customers’ shopping experience. Apart from these, the company seeks to improve product mix. In a bid to strengthen its financial profile, the company is focusing on women’s apparel and soft home categories, which are being viewed as profitable businesses.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -23.1% due to these changes.

VGM Scores

At this time, Penney has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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.

Outlook

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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