JCPenney Stock Sizzles Despite Lackluster Q2 (JCP)

JCPenney stock - JCPenney Stock Sizzles Despite Lackluster Q2 (JCP)

Source: Mike Mozart via Flickr (Modified)

J C Penney Company Inc (NYSE:JCP) is showing that its improvements are getting more attention than its struggles. JCPenney stock is up another few percent Friday morning following its Q2 earnings report, following up an 8% gain leading into the announcement.

JCPenney Stock art

The retailer reported a loss of 18 cents per share of JCPenney stock, narrowing its red ink from 41 cents in the year-ago quarter. Once it backed out one-time items, JCP lost just 5 cents per share, which was enough to beat expectations for a 15-cent loss.

Revenues were a different story. Sales of $2.92 billion were slightly better than last year’s $2.88 billion, but Wall Street was looking for $2.93 billion. Meanwhile, same-store slaes of 2.2% also fell short of expectations for a 2.4% lift.

JCPenney had topped earnings estimates in nine of its past 10 quarters, so last quarter improves the record to 10 of the past 11. Moreover, each quarter’s earnings has now shown year-over-year improvement since 2015.

JCPenney stock originally fell a couple percent immediately after the release, but Wall Street changed its tune and bid JCP shares about 2% higher before Friday’s bell.

CEO Marvin Ellison said of the results:

“We are pleased with the sequential improvement we achieved throughout the second quarter, and our solid performance across all key metrics is encouraging. We exceeded our profitability expectations, achieving an $85 million or 59 % increase in EBITDA to $229 million for the quarter. We are continuing to win market share and improve the bottom line of our business thanks to the commitment and hard work of our over 100,000 associates.”

Recovery Road for JCPenney Stock, Other Retailers?

The results come at a time when most bricks-and-mortar retailers had been struggling, but may be recovering.

Nordstrom, Inc. (NYSE:JWN) reported a 64% drop in its net income in Q1 of this year. Kohl’s Corporation (NYSE:KSS) saw its bottom line shrink by 87% on a YoY basis in Q1, and comps were off by nearly 4%. They and most other retailers simply explained the weakness as a lack of interest in buying apparel. But for the second quarter, like JCPenney, Nordstrom, Kohl’s and even Macy’s Inc. (NYSE:M) all topped their earnings estimates.

Once-iconic retailer JCPenney imploded in 2012 after former Apple Inc. (NASDAQ:AAPL) and Target Corporation (NYSE:TGT) executive Ron Johnson took over as CEO in November 2011. Johnson managed the highly traditional retailer not unlike a fast-paced Apple store, without recognizing it was catering to a different customer, or at least a customer with a different mindset. He also rolled out expensive programs without testing them, only to see many of them flop.

Though JCPenney stock was already hitting a headwind at the time, Johnson’s missteps pushed the company deep into the red. In 2012, JCP swung to a loss of $152 million — versus a profit of $389 million the year before — and ultimately set up a $1.4 billion loss in 2013.

Former chief Myron “Mike” Ullman was brought back in April 2013 to plug the holes in the sinking ship, and he has. Although JCPenney is still booking losses, sales are growing again, and the losses have been progressively smaller since 2014.

Home Depot Inc (NYSE:HD) executive Marvin Ellison was named Ullman’s successor in late 2014, though he didn’t take the reins until August of last year.

Ellison hit the ground running too, with an even more scientific approach. The new CEO insisted the company develop better profiles of each of its 87 million regular customers, beef up its omnichannel capabilities and adjust its product lines to a more fruitful mix — more private brands, bringing back appliances and becoming less reliant on clothing sales.

JCP Isn’t Out of the Woods

For the full year, analysts were expecting JCPenney to post per-share profits of 3 cents, versus a year-ago loss of $1.03 per share. Revenue was projected to reach $12.81 billion, up 1.5% from the prior year’s top line. The company said it foresees a 2016 EBITDA total of $1 billion, and further anticipates positive (though non-specific) “positive” per share earnings.

The balance sheet, however, has been a growing concern.

While owners of JCPenney stock may see a light at the end of the tunnel, it’s a distant light. JCP is still booking losses, and a cash crunch could be on the horizon. As of the end of the first quarter, the retailer had just $664 million in cash or near-cash assets to draw on, down from $1.9 billion a year earlier. As of the end of the second quarter, JCP only had $429 million in cash or cash equivalents. For perspective, the company lost $56 million last quarter.

JCP was able to refinance some of its debt earlier in the year, setting up a cost savings of $24 million per year. But it’s still going to need to accelerate its move to positive cash flow sooner than later.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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