JC Penney Posts Profit but Is the Company Disappearing Before Our Eyes?

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J.C. Penney Co. Inc. (NYSE: JCP) used all-caps Friday morning to report positive net income for fiscal year 2016. The company also announced (again in all caps) that it will close 130 to 140 stores in the next few months in order to “optimize its national retail operations as part of the Company’s return to profitability.” Shares traded up by as much as 2.5% in Friday’s premarket.

The venerable retailer reported an adjusted diluted loss per share of $0.64 and $4 billion in revenues. In the same period a year ago, J.C. Penney reported a net loss of $0.39 on revenue of $4 billion. Fourth-quarter results also compare to consensus estimates for EPS of $0.61 and $3.98 billion in revenue.

J.C. Penney plans to close two distribution centers and 130 to 140 stores to mitigate the effect of falling foot traffic. The closures total about 13% to 14% of the company’s total but represent less than 5% of total annual sales and no net income.

The company is also commencing an early retirement program for about 6,000 eligible associates. J.C. Penney also expects to see a net increase in hiring as the number of full-time associates expected to take advantage of the early retirement incentive will exceed the number of full-time positions affected by the store closures.

Same-store sales slipped 0.7% in the quarter and were flat compared with the 2015 fiscal year. On a GAAP basis, J.C. Penney posted EPS of $0.61, compared with a loss of $0.43 per share in the fourth quarter of 2015. For the full year, the company broke even in 2016, compared with a loss of $1.68 per share in 2015.

Full-year revenues slipped 0.6%, from $12.63 billion in 2015 to $12.55 billion 2016. Gross margin fell by 3.7% in the fourth quarter and by 1.6% for the full year. Net income for the year was $1 million, compared with a net loss of $513 million in 2015. For the quarter, net income totaled $192 million, up from a net loss of $131 million in the year-ago fourth quarter.

Operating expenses fell by nearly 25%, from $1.38 billion to $1.04 billion, of which $200 million was due to reduced pension expense.

J.C. Penney’s outlook for 2017, including the impact of closing stores, calls for same-store sales to be flat, plus or minus 1%. Gross margin is forecast to improve by 20 to 40 basis points, SG&A expense is expected fall by 1% to 2% and adjusted EPS is forecast at $0.40 to $0.65. Consensus estimates call for a first-quarter net loss of $0.19 and revenues of $2.85 billion. For the full year, analysts expect EPS of $0.56 and revenues of $12.76 billion.

The company’s CEO, Marvin Ellison, said:

This year, we delivered positive net income and generated EBITDA of over $1 billion. This is a reflection that the growth initiatives we laid out at our analyst meeting are working. These initiatives drove significant category growth in the fourth quarter, and provide us a platform to build upon in the years to come. Although our quarter was negatively impacted by the first three weeks of November, we are pleased that we delivered positive sales comps in the combined December and January period. We also saw record online performance over the holiday season, and with our continued focus on improved site functionality, expanded and enhanced fulfillment and continued growth in our assortment, we know this will allow us to deliver significant growth in the digital business.

In order for J.C. Penney’s plan to work, the company is once again counting on cutting costs. Annual cost savings are estimated at $200 million, after a pretax charge of around $225 million in the first quarter for lease termination and other costs. As the forecast indicates, there’s not a whole lot of bang associated with the bucks that will be saved.

The question is how long J.C. Penney can continue to close poorly performing stores and cut costs to offset stagnant revenues and declining margins. Institutional investors hold slightly more than 85% of the stock, and these guys are typically patient, so a slow decline needs to reach a tipping point before they bail out. At last count, 25% of the company’s float was short.

The stock closed down about 2.7% on Thursday to $6.86, and it traded down 2.3% in Friday’s premarket. The stock’s 52-week range is $6.35 to $11.99. The 12-month consensus analyst price target was $9.91 before this morning’s announcement.