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J.C. Penney Earnings Preview: Is The Turnaround On Track?

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J.C. Penney (NYSE: JCP) will report its first quarter 2014 results on Thursday morning. Analysts are expecting the retailer to post a net loss of $1.25 per share on revenue of $2.71 billion.

J.C. Penney reported its fourth quarter 2013 results on February 26. Shares surged higher by more than 20 percent after the company reported a net loss of -$0.68 per share, beating analysts expectations for a loss of -$0.85 per share. Revenue of $3.78 billion slightly missed analysts' expectations by $70 million.

Despite a revenue miss, investors found plenty of positives in J.C. Penney's two percent same-store sales growth and a 460 bps improvement in gross margin rate from a year ago.

J.C. Penney guided for further comp sales growth in fiscal 2014 to be in the mid-single-digits and for margin to further expand.

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J.C. Penney guided for comparable store sales to rise three percent to five percent in the first quarter with a gross margin improving from the same quarter a year ago.

Following J.C. Penney's guidance for the first quarter, investors will be paying very close attention to the company's results. If the company reports an in-line or above comparable store sales growth, it could be assumed that the retailer's turnaround and growth plans are on track.

UBS: Upgrading Prior To Earnings

Michael Binetti of UBS believes that J.C. Penney has fewer “miss & lower” catalysts in the near-term, prompting an upgrade from Sell to Neutral on May 7.

“In our view, J.C. Penney has less 'miss & lower' risk on same-store-sales and gross margin in the first half of fiscal 2014 while lapping significant one-time drags from extremely high clearance levels – and having 19 percent of total square footage under construction in the first half of fiscal 2013,” Binetti wrote in his upgrade note.

However, the analyst added that the “stock debate” will resume in the second half of fiscal 2014 when the retailer approaches the all-important winter holiday shopping season. J.C. Penney will be tested yet again on its ability to drive traffic back to stores as year-over-year comparisons normalize.

Binetti notes that in the first and second quarter, J.C. Penney will benefit from an environment where deep discounting should subside. Additionally, with reconstruction of the Home department complete, the company is able to fully realize sales from the approximately 19 percent of total square footage that was previously offline.

With the "Ron Johnson era" inventory mostly cleared at this point and replaced with brands consumers know (like St. John's Bay), gross margins should improve “sequentially toward historical levels,” according to Binetti. In fact, the analyst crunched up the numbers and notes that every one percent of reduction in clearance mix translates to a 0.5 percent improvement in J.C. Penney's gross margin.

Binetti believes that J.C. Penney's continued improvements in its ecommerce business could contribute 1.6 percent to 2.4 percent to same-store sales in the first half of 2014.

Binetti is projecting J.C. Penney will post a loss of $1.21 per share on revenue of $2.675 billion in the first quarter.

Shares are Neutral rated with a $9 price target.

Deutsche: Real Challenge Comes Later

Paul Trussell of Deutsche Bank believes that now is the greatest opportunity for J.C. Penney to demonstrate top-line growth under the current leadership.

“Early April marked the one year Anniversary of Myron Ullman's return to J.C. Penney as CEO,” Trussell wrote in a note to clients on May 12. “In our view, the present represents the time J.C. Penney's current strategy is the furthest from what Ron Johnson had implemented, and therefore presents the greatest opportunity to see top-line increases.”

Trussell will not be surprised if J.C. Penney reports a same-store-sales growth of 3.5 percent in the first quarter with a solid 0.68 percent improvement in gross profit margins.

Nevertheless, Trussell believes that even if J.C. Penney reports an impressive first quarter, the company's turnaround efforts are not guaranteed.

“With a need to discount aggressively in order to draw traffic and the lack of key brands in-store, we continue to be skeptical of the company's turnaround efforts,” said Trussell.

Trussell is projecting J.C. Penney will post a loss of $1.40 per share on revenue of $2.73 billion in the first quarter.

Shares are Hold rated with a $6 price target.

Latest Ratings for JCP

DateFirmActionFromTo
Sep 2014Imperial CapitalMaintainsUnderperform
Aug 2014BTIG ResearchDowngradesBuyNeutral
Aug 2014Craig-HallumUpgradesSellHold

View More Analyst Ratings for JCP
View the Latest Analyst Ratings

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