The U.S. retailer, JC Penney (JCP, Financial) reported its third quarter earnings after the market close on Wednesday, November 12, and its mixed set of numbers did impact the stock which fell 3.2% in after-hours trading. In fact, as this retailer’s numbers almost matched those of Macy's (M, Financial) released a day earlier, it made investors worried on their positions in the stock. As consumer spending has come under tight control, conventional retailers such as Macy's and JC Penney have started feeling the heat. Analysts are expecting retailers like Kohl's (KSS, Financial) and Walmart (WMT, Financial) to follow suit and that would be clearer when their third quarter results for the fiscal year are out. Until then, let’s concentrate on JC Penney and find out why investors are getting tensed about the numbers generated in the quarter.
The numbers spell disappointment
The venerable retailer reported revenue of $2.76 billion, which was slightly lower to $2.78 billion made in the same quarter last year. However, the adjusted diluted earnings per share loss stood at $0.62 per share which was below the loss of $1.85 a share witnessed a year ago.
The third-quarter results were comparable to the Thomson Reuters consensus estimate for an EPS loss of $0.80 a share, while revenue missed to meet the expectations of $2.81 billion for the quarter. The top line growth might have been a bit lousy but the bottom line grew as the company did exercise a tight rein on costs keeping them under control.
Sales were mainly down due to the unseasonably warm weather, which prevented sales of fall and winter apparel like coats, sweaters and boots. Even the CEO, Myron Ullman, stated, “This quarter shows the progress we are making in the final phase of JC Penney’s turnaround. … Like most retailers, following a strong start to the back-to-school season, sales did slow in September and October as unseasonably warm weather hindered the sale of fall goods.”
The company’s lower-than-expected loss was welcome news, but the company has beat the loss estimates now in four consecutive quarters and nothing else has changed much even after starting with the turnaround program. Sales were dismal with flattish same-store sales reported in the quarter. However, the inventory management has been better this quarter and the retailer’s inventory decreased 10.3% to $3.4 billion during the quarter.
The retailer said that the home and jewelry segments were among the top performing merchandise divisions during the quarter, and geographically the west and northwest were the strongest.
Looking forward
The retailer projects comparable store sale growth between 2% and 4% for the fourth quarter. JC Penney expects the full-year comparable store sales to grow between 3.5% and 4.5%. The CEO stated that he is confident that the sales will pick up as it approaches the holiday season. He said, “This year, we are confident customers will once again choose JC Penney for meaningful holiday gifts that fit their family's budget …”
Gross margins are expected to rise by 5% to 6% in the fourth quarter. Free cash flow is expected to remain positive, and liquidity is forecast to rise from $1.9 billion to $2.1 billion by the end of the fiscal year.
Wall Street analysts have estimated that EPS would be around $0.13 a share during the fourth quarter, and revenue to come in at $3.88 billion. Full-year estimates include EPS loss of $2.56 a share on revenue of $12.29 billion.
The stock is under pressure
It’s worth remembering that JC Penney’s stock did slump sharply last month after the retailer updated analysts that the third-quarter numbers would be worse than had been actually predicted. Sales petered out in September and were not better in the month of October as well. The stock which was struggling at $10 to $11 range fell 3.87% after the actual third quarter results were released in after-hours trading session. In fact, on a year to date basis the stock is down 15%.
Investors seem to be less convinced on the turnaround scheme as traffic still remains negative, though it’s improving sequentially helped by Sephora, the makeup business that appears to be an integral part of the overall growth opportunity as the company repairs itself.
Last word
In short, JC Penney is trying to cut its losses considerably in the fiscal year, but with store traffic on a decline it requires new strategies to lure in more shoppers. As the retailer is already in the final phase of the turnaround story, it’s expected that it would recover and will be able to resist the headwinds it faces in the fourth quarter and in the coming fiscal year. Investors might stay invested in the long term as the retailer is leaving almost no stone unturned to reverse its story from failure to reach the expected numbers to success in the coming quarters.
