A year ago, the market was satisfied with some evidence — any evidence — that JCPenney (JCP) was indeed getting traction in its turnaround. Now, however, JCP stock holders are getting much pickier.
Despite JCP’s impressive improvement to its top and bottom line for the previous quarter exceeding expectations, it’s lackluster sales-growth outlook coupled with concerns of consumers holding onto their money going into the holiday season sent JCP stock careening Friday.
It begs the question … what’s it going to take for the market to put enough faith in JCPenney before they can even consider buying and holding JCP stock?
Unfortunately, as much as Penney is on the right path, investors have good reason to be concerned; not because the retailer lacks the know-how it needs, but because it may lack the time.
Rundown on JCP Stock Earnings
In its third fiscal quarter of 2015, JCPenney lost 47 cents per share (a net loss of $137 million) on sales of $2.9 billion. Both were better than the year-ago figures of a loss of 62 cents on revenue of $2.76 billion.
Better yet, the iconic retailer — still the nation’s third-largest department store chain — handily topped analyst estimates calling for a loss of 55 cents on revenue of $2.88 billion.
The holy grail in JCPenney’s earnings report for the third quarter, though, was same-store sales — up a hefty 6.4%. That’s the strongest growth JCP has seen in over a year.
JCP, however, doesn’t expect to sustain that same growth pace heading into the fourth quarter, reiterating a prior outlook for full-year same-store sales growth of between 4% and 5%. This was the key point of contention for investors, who sent JCP stock down about 12% in afternoon trading following the release of the earnings report.
In some regards it’s unfair to expect same-store sales growth in excess of that 4% to 5% range. The first quarter’s same-store sales growth of 3.4% and Q2’s same-store sales growth of 4.1% (a mathematical average of same-store sales growth of 4.6%, year-to-date) were already logged and can’t be retroactively improved.
Moreover, JCP is on pace to produce the sales growth it previously projected. Investors are fickle, however, and largely interpreted the modest same-store sales growth outlook as a sign that it didn’t expect to keep up its growth pace during the all-important holiday shopping season.
The Clock Is Ticking for JCP Stock
Perhaps lingering in investors’ minds as an extension of sales-growth concerns is that even as well as JCPenney is progressing its sales and earnings, it’s still booking significant losses and burning cash.
Last quarter’s net loss of $137 million was an improvement on the $188 million it lost in the third quarter of 2014. On an operating basis it used $232 million worth of cash, which was less than the $320 million worth of negative cash flow seen in Q3 2014.
Those aren’t staggering amounts, and JCPenney has $638 million in the bank, plus another $311 million worth of inventory in stores that it didn’t have at this time last year. But increasingly smaller losses don’t change the fact the retailer is still bleeding money and may run out of cash before it finally works its way back into the black.
JCPenney does have options, though, if it looks like that concern becomes a reality. For instance, JCP can issue shares to raise funds, or it can sell debt. Neither are going to be well-received by investors, however; the former would dilute JCP stock, and the latter would likely be expensive considering that Rapid Ratings recently exclaimed Penney’s existing debt is at a high risk of default and its corporate health is in poor condition.
The best — and perhaps only — solution is for JCPenney to start digging its way out of its hole at a faster pace … before it runs out of money. In that sense, the market is right — it’s going to take same-store sales growth of more than 4% to 5% for the retailer to reach viability before its coffers are empty.
It’s a frustrating conundrum to be sure. JCPenney is doing the right things, it just started doing them so far behind that eight ball that tremendous progress in the interim means little.
All the same, while a lack of liquidity may force one more round of financing (equity would be preferable to debt), the fact that there’s a light at the end of the tunnel keeps JCP stock in the hunt for an eventual advance.
JCP stock is not for the faint of heart though, nor will it create any overnight fortunes anytime soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
