Shares of struggling department store retailer J.C. Penney (NYSE:JCP) have shown surprising signs of life recently, rising roughly 75% over the past three months amid aggressive insider buying. Specifically, in late August, the CEO, the Chairman and a few board members bought a bunch of JCP stock. Investors joined them, and ever since, JCP stock has rallied from under 60 cents, to above $1.
Now, J.C. Penney is set to report third-quarter numbers before the open next Friday, Nov. 15. This earnings report will do one of two things. Either it will confirm recent strength in the stock with strong and improving numbers, or it will kill the rally with yet another dose of weak quarterly numbers.
I think the latter is more likely to happen than the former.
My research indicates that J.C Penney didn’t have a great quarter. While margins may have improved, sales trends likely remained sluggish. Continued struggles on the top-line will make the recent rally in JCP stock seem like it was built on hot air, and shares will likely pull back in the wake of its Q3 earnings report.
The investment implication? Don’t chase the rally in JCPenney stock. Instead, fade it into the third-quarter print.
J.C. Penney Earnings Won’t Be Great
Multiple data-points suggest that J.C. Penney’s third-quarter numbers won’t be great.
On the positive side, margins should impress in the quarter. Last quarter, J.C. Penney reported a surprise 310 basis point increase in gross margins amid rising sell-through rates and improved inventory and markdown management. In the quarter, JCP also reported a 12.5% drop in inventory, meaning the department store retailer headed into the third quarter with significantly reduced inventory levels. Broadly, the data and trends here seem to imply that JCP could report yet another impressive quarter on the gross margin front.
But, that’s where the positives end. In addition to reporting impressive margin numbers, J.C. Penney will likely report unimpressive revenue numbers. Simply consider the following:
- Data from foot traffic analytics firm Placer.ai shows that JCP in-store traffic trends remained soft over the past few months, as they have been soft over the past few years.
- Google Trends search interest data shows that U.S. search interest related to JCP has been falling for several years, and continued its bearish descent over the past few months.
- SimilarWeb web traffic data shows jcpenney.com’s relative traffic rank among all websites, U.S. websites and fashion and apparel websites continues to trend down.
- Data from The U.S. Census Bureau shows that broad department store sales trends were ugly from July through September, with department store sales dropping a concerning 5.6% year-over-year during that stretch.
Big picture — the department store sector is still losing relevance at a rapid rate in the retail landscape, and J.C. Penney continues to struggle to drive traffic and sales gains in this adverse environment. The quarterly numbers will reflect this dour reality.
JCPenney Stock Is Susceptible to a Pullback
JCPenney stock will most likely sink if Q3 revenue numbers fail to inspire confidence — even if the margin numbers do impress.
Last quarter, J.C. Penney reported very similar numbers. Margin trends improved. Revenue trends remained ugly. That combination of margin improvements but continued revenue weakness ultimately led to JCP stock going essentially nowhere, because decreasing revenues imply that, regardless of where margins end up, JCP will have a tough time reporting and keeping a profit.
JCP stock was at 60 cents then. Now, it’s up 75% from those levels, thanks to insider buying. Clearly, a lot more optimism is priced into JCP stock today, than was priced in back in mid-August. If JCP stock reports an identical quarter to what it reported back in August — strong margins but weak revenues — then all this optimism will seem unwarranted.
Investors will fade the rally, and JCP stock will drop on renewed concerns that this company may not ever turn its sinking ship around.
Bottom Line on JCP Stock
JCP stock is a secular loser that has been the beneficiary of an insider-buying-driven bounce over the past few months. Third-quarter numbers won’t confirm the optimism, which has powered this dead-cat bounce. As such, when disappointing Q3 numbers hit the tape, JCP stock could fall in a big way.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
