JCPenney Earnings Preview: What to Look For

An uneventful earnings report would be a good thing for JCP

JCPenney (JCP) earnings are due Thursday after the close of trading. JCP stock is up 64% since announcing positive Q4 2013 earnings Feb. 26. In order to keep the momentum going, it will need to deliver more good news in its Q1 report.

JCPenney185What can investors expect from JCPenney earnings?

Core retail sales in general have been a mixed bag so far in fiscal 2014. They were up 0.3% in February, up a robust 1.3% in March and down 0.1% in April. More importantly, department stores as a group experienced a 0.3% year-over-year decline in April sales. It’s clear that consumers are obviously still skittish about spending and took a breather this past month after going relatively wild in March.

Investors shouldn’t expect much good or bad from JCP earnings. Chances are it will be a non-event providing little in the way of a catalyst for JCP stock in either direction. Here’s why:

Q1 JCPenney Earnings Preview

The consensus estimate for revenue is $2.71 billion along with a $1.25 loss per share. Assuming it meets or exceeds both estimates, JCP will have improved its business on both the top and bottom line. Analysts from Citigroup (C) believe it can deliver positive same-store sales growth in Q1 between 3% and 5% and mid-single digits for all of 2014. With department store sales generally weak, I’m a bit skeptical about this prediction.

That said, the current quarter is working against some pretty weak numbers — Q1 2013 saw total sales decline 16.4% and same-store sales 16.6% — making the comparison that much easier. If it hits Citigroup’s estimate, investorsshorting JCP stock (30% short interest) surely won’t be happy.

JCPenney Earnings — First Thing to Look For

Profits and losses are meaningless without cash. Without liquidity, there is no business. When Mike Ullman took back the reigns of JCP in April 2013, the business had lost 30% of its sales and was hemorrhaging cash. Fast forward a year and Ullman has managed to right the ship. Its liquidity at the end of the fiscal year stood at more than $2 billion — well in excess of the $1 billion needed to keep the lights on. It’s unlikely that this number will have changed much in what’s usually considered the slowest quarter of the retail year. Nonetheless, it’s important to keep an eye on it.

JCPenney Earnings — Second Thing to Look For

Its fourth quarter was adversely affected by the continuing transformation of JCPenney’s home department, which definitely hurt margins and JCP earnings. By now, it has received a complete makeover, and positive results should begin appearing as soon as this quarter. Once upon a time, JCPenney’s private label brands accounted for 50% of revenue. That dropped to 30% under Ron Johnson’s disastrous leadership.

Ullman seeks to move the needle back to where it once was while mixing in a few name brands that resonate with customers. Hopefully, JCP management will shed some light on the progress of its private label brands in its conference call Thursday. I wouldn’t be concerned about the actual numbers, but rather the tone with which the company presents the relevant information. Any attempt to gloss over it should be viewed as a negative, but I’m doubtful that will be the case.

JCPenney Earnings — Third Thing to Look For

JCP seems to have turned a corner when it comes to online sales. In the fourth quarter, saw sales increase 26% to $381 million while its full-year numbers jumped 6% to $1.1 billion, its first year-over-year increase since 2011. While nowhere near the $1.6 billion it generated three years ago, Ullman intends to accelerate growth.

Currently, online sales represent about 9% of sales for the company. As a sign it is continuing to drive its online business in the right direction, I’d be looking for any number above 10% in Q1. And if same-store sales growth be weaker than the 3% to 5% projected by Citigroup, shareholders should be happy with online sales growth of any kind.

JCPenney Earnings — Bottom Line

A major positive would be any kind of discussion about hiring a permanent CEO. Roger Farah recently announced that he is leaving Ralph Lauren (RL) after 14 years as president and chief operating officer. According to Forbes contributor Walter Loeb, Ullman and Farah are good friends. While Farah is only six years younger than Ullman, he’d make a great CEO. I’m not saying it will happen, but it would be a smart hire if Farah wants one more kick at the cat.

If you’re long JCP stock, you’ll want to see a management team Thursday that’s enthusiastic about its business. JCPenney earnings don’t have to be perfect (and they won’t be), but they do have to paint a picture of a company heading in the right direction. I believe Mike Ullman’s managed to save the business and now it’s time to get someone on board to take it to a better place.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

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