Shares Rally as JC Penney's Loss Narrows - Analyst Blog

J. C. Penney Company Inc.'s JCP turnaround strategies seems to have paid off as the company posted yet another quarter of narrower-than-expected loss sending the stock price up nearly 20% in the aftermarket trading hours, yesterday.

J. C. Penney posted first quarter fiscal 2014 adjusted loss of $1.16 that fared far better than the Zacks Consensus Estimate of a loss of $1.27 and a loss of $1.31 reported in the prior-year quarter.

Including one-time items, quarterly loss came in at $1.15 per share, compared with a loss of $1.58 per share in the year-ago period.

After a disastrous run under former CEO Ron Johnson, J.C. Penney now seems to be recuperating. Current CEO Mike Ullman has launched a powerful turnaround strategy that has bought back traffic to its stores. According to the CEO, J.C. Penney is now aiming to “go forward,” with the third stage of its turnaround, after having completed “immediate stabilization” and “rebuilding” in the last 10 months. Though the company might take a while to get back to its former glory, we remain optimistic as Ullman's strategies appear to be on the right track.

Along with J. C. Penney, some other big retailers also provided the quarterly update yesterday. Wal-Mart Stores Inc. WMT has yet again disappointed its investors by posting weaker-than-expected earnings and revenues. Wal-Mart's fiscal first quarter 2015 adjusted earnings of $1.10 per share lagged the Zacks Consensus Estimate of $1.15 per share and revenues of $114.96 billion fell short of the Zacks Consensus estimate of $115.96 billion.

However, apparel retailer, Nordstrom Inc. JWN posted better-than-expected first-quarter fiscal 2014 results. Quarterly earnings of 72 cents per share and total revenue of $2,931 million surpassed the Zacks Consensus Estimate of earnings of 67 cents and revenues of $2,877 million, respectively.

A day before, Macy's Inc. M posted first quarter fiscal 2014 earnings of 60 cents a share, which came in a penny ahead of the Zacks Consensus Estimate. However, revenues of $6,279 million fell short of the Zacks Consensus Estimate of $6,460 million.

Coming back to J. C. Penney, the quarterly sales grew 6.3% year over year to $2,801 million and was miles ahead of the Zacks Consensus Estimate of $2,717 million.

Also, comparable store sales (comps) increased 6.2% as against a decline of 16.6% in the prior-year period. Comps depicted a sequential improvement in all three months of the quarter. Online sales through jcp.com rose 25.7% year over year.

Men's and Women's apparel, Home and Fine Jewelry were the best performing categories. Performance of Sephora stores was also commendable. Regionally, sales improved across board especially in the western and central regions of the country. During the quarter, J. C. Penney opened 30 Sephora outlets, bringing the store count to 476.

Gross profit grew 14.0% to $926 million. Gross profit margin expanded 230 bps to 33.1%, in spite of unfavorable impact from inventory clearances as well as negative clearance margins.

J. C. Penney's adjusted operating loss significantly narrowed during the quarter and came in at $242 million compared with an adjusted loss of $389 million in the year-ago period.

Other Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $1,170 million, long-term debt of $4,834 million and shareholders' equity of $2,753 million. Moreover, the company generated negative free cash flow of $349 million in the said quarter. The company incurred capital expenditures of $80 million in the quarter.   

J. C. Penney has underwritten a $2.35 billion worth of senior secured ABL credit facility to substitute the company's existing $1.85 billion ABL bank line (maturing in April 2016). The financing will provide better pricing terms and additional liquidity of $500 million during high seasonal demand.

Guidance

For second-quarter fiscal 2014, J. C. Penney anticipates comps to increase in mid-single digits. Additionally, gross margin is projected to improve on a sequential basis, while selling, general and administrative (SG&A) expenses are expected to decrease marginally, on a year-over-year basis.

For fiscal 2014, management continues to expect comps to increase in mid single digits while gross margin is projected to improve considerably from the prior-year quarter. Capital expenditure is expected to be $250 million for the year. The company also anticipates liquidity of over $2 billion at the end of the year while free cash flow would be at breakeven level.

Currently, J.C. Penney carries a Zacks Rank #4 (Sell).

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