It has been about a month since the last earnings report for J.C. Penney (JCP). Shares have added about 0.9% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Penney due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
J. C. Penney Q3 Loss Narrower Than Expected, Sales Lag
J. C. Penney reported narrower-than-expected loss in third-quarter fiscal 2019. Lower cost of goods sold, improved gross margins and a decline in SG&A expenses impacted quarterly results. However, sales missed the consensus mark for the third consecutive quarter. Sluggishness in comps might have hurt the top line to some extent.
Moving on, the company’s turnaround efforts — including the early implementation of Plan for Renewal, which aims at driving traffic, enhancing customer shopping experience and offering compelling merchandise — have started to gain traction. These apart, CEO Soltau’s other endeavors — including the partnership with largest fashion resale marketplace thredUP, significant changes in leaderships, optimization of inventory levels and closing of underperforming stores — are contributing to results.
The company posted adjusted loss of 30 cents, narrower than loss of 52 cents reported in the year-ago quarter. Moreover, the figure was narrower than the Zacks Consensus Estimate of a loss of 55 cents.
Total revenues (including total net sales, and credit income and other) in the quarter were $2,500 million, which declined 8.5% from the prior-year quarter’s figure and missed the Zacks Consensus Estimate of $2,529 million.
Total net sales of $2,384 million fell 10.1% year over year. Soft comparable store sales (comps) were a deterrent. Nevertheless, fine jewelry, women’s apparel, footwear and men’s apparel categories performed well.
Further, credit income and others totaled $116 million, up 45% on a year-over-year basis on gains from the company’s credit portfolio.
Comps in the quarter declined 9.3% year over year. This can be attributed to the company’s exit from major appliance and in-store furniture categories, which impacted comps to the tune of 270 basis points (bps). These exits were carried out as part of its turnaround initiatives to focus on profitable areas.
Adjusted comps decreased 6.6%, owing to lower transactions, partly offset by higher average transaction value.
Cost of goods sold was $1,541 million, down 14.8% from the prior-year quarter’s figure. As a percentage of net sales, the metric improved 350 bps, courtesy of improved shrink rates as well as margin gains from stores and online sales. Gross margin (on the basis of total net sales and cost of goods sold) expanded 350 bps to 35.4%. Adjusted EBITDA improved more than two-fold to $106 million.
SG&A expenses declined 3.3% to $854 million on a decline in advertising and store controllable expenses, offset by rise in incentive compensation. As percentage of net sales, SG&A expenses increased 250 bps to 35.8%.
Other Financial Details
J. C. Penney ended the quarter with cash and cash equivalents of $157 million compared with $168 million in the year-ago period. Meanwhile, long-term debt was $4,011 million, down 3.6% from the year-ago quarter’s figure. Shareholders’ equity totaled $868 million at the end of the quarter. Merchandise inventory levels declined 9% to $2,934 million. The company reported negative free cash flow of $518 million in the first nine months of fiscal 2019. Further, during this period it incurred capital expenditure of $226 million.
Management continues to expect comps decline of 7-8%. Excluding the impact of exit from major appliance and in-store furniture categories, comps are still anticipated to decline 5-6%. It expects a decline of 150-200 bps in cost of goods sold (as a percentage of net sales). Additionally, management continues to expect positive free cash flow for the fiscal year. Moving on, the company now expects adjusted EBITDA of $475 million for fiscal 2019. Also, it anticipates gross margin for the fiscal year to improve.
J. C. Penney highlighted that it is undertaking efforts in the operating front to improve performance. In this context, the company remains focused on driving store traffic and enhancing merchandise. Further, in a bid to lure customers, it is testing a new store format, which includes yoga studio, videogame lounge and lifestyle workshops. In this regard, the company recently launched a brand-defining store in Hurst, TX. The store will serve as a lab for extensive consumer research.
Moreover, J. C. Penney collaborated with the Hallmark channel as part of its preparation for the holiday season sale. Additionally, the company is on track to add key national brands — including Instant Pot, Ninja, Brookstone and Sharper Image — to boost the top line. Moving on, it implemented visual merchandising in the women’s category in 92 stores. Despite such well-chalked out plans, experts believe that J. C. Penney still has a long way to go before these strategies start reaping benefits.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -144.44% due to these changes.
Currently, Penney has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Penney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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J. C. Penney Company, Inc. (JCP) : Free Stock Analysis Report
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