One can’t help but wonder if Macy’s, Inc. (M), Kohl’s Corporation (KSS) and Nordstrom, Inc. (JWN) all hadn’t alarmed investors this week with lackluster first-quarter numbers and/or tepid outlooks, investors would have been willing to see J C Penney Company Inc (JCP) stock as half-full rather than half-empty.
After all, the loss was much small than expected despite the year-over-year tumble of the top line.
Such speculation is irrelevant at this point, of course. JCP stock is taking a 4% hit today on the heels of a Q1 report that gave shareholders more reason to panic than party.
While JCPenney remains optimistic, the market is concerned last quarter’s results are a sign of a larger slowdown in U.S. consumerism.
JCPenney Q1 Earnings Report
Last quarter, iconic retailer JCPenney lost 22 cents per share (operating) on sales of $2.81 billion. The adjusted bottom line of 32 cents was better than the analyst-anticipated loss of 40 cents per share of JCP stock, though the top line of $2.81 billion was down 1.6% year-over-year and missed estimates of $2.92 billion.
However, the per-share loss was 43% better than the loss of 49 cents per share (operating) of JCP stock booked for the first quarter of 2015.
Perhaps the factor that tipped the scales against JCPenney on Friday was the surprisingly disappointing same-store sales comparison. Rather than growing 3.3% as analysts had projected, they fell 0.4%. It was the first same-store sales dip for JCPenney in six quarters.
CEO Marvin Ellison said of the numbers:
“The first quarter was clearly challenging from a sales perspective. Although our business was not immune to the issues facing other retailers, I am pleased that we were able to deliver our second consecutive quarter of positive operating profit. In addition, the teams did an excellent job of proactively managing the business throughout the quarter to ensure we remained a fiscally disciplined organization. As a result, we exceeded our profitability expectations, achieving a 63 % increase in EBITDA to $176 million for the quarter.”
The company said its men’s, Sephora, footwear and handbag divisions were the bright spots for the quarter.
Looking Ahead
Despite the first-quarter sales lull, the retailer still foresees same-store sales growth of between 3% and 4% for 2016.
It did cut its gross margin guidance for the full year, however. Rather than the initially-anticipated improvement of 40 to 60 basis points, JCPenney is now only looking for gross margin growth of 10 to 30 basis points.
The most compelling aspect of the company’s 2016 guidance: It’s still calling for EBITDA of $1 billion.
Although JCP only generated $176 million worth of EBITDA in the first quarter, Q1 is often the weakest quarter of the year for retailers. Its fourth quarter could easily roll in more than twice the first quarter’s total. Last year’s EBITDA was a healthy $581 million, up 96% from the prior year’s total of $295 million. The pace of progress says JCPenney is — or was — driving respectable sales growth, but spending effectively and cutting costs where it feasibly can.
Helping to drive that EBITDA growth will be the introduction of appliances to almost 500 stores later this year following a successful three-store pilot program. That puts JCPenney toe to toe with the likes of peers such as Sears Holdings Corp (SHLD), and non-rivals like Home Depot Inc (HD) and Lowe’s Corporation (LOW).
JCP’s product line overhaul also includes the addition of window treatments, and the retailer is even experimenting with furniture and flooring.
Bottom Line for JCP Stock
The company is doing what it can to grow, and adapting to the headwinds it can’t change … including playing some offense when defense won’t do (e.g. getting into the appliance business). In light of other retailers’ earnings reports, the one posted for JCPenney on Friday morning wasn’t horrific.
Based on the bearish response from JCP stock though, investors simply aren’t buying into the company’s optimistic growth story.
And perhaps the market is right to have its doubts. But of all the retailers — and apparel retailers in particular — that have spooked investors this earnings season so far, JCPenney seems to have a better handle on its plight than the rest.
That, coupled with the fact that JCP stock has now fallen 37% from its March peak, may actually make JCPenney a worthy speculation here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
