Why JC Penney Earnings Disappointed Investors

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J.C. Penney Co. Inc. (NYSE: JCP) reported first-quarter 2017 results before markets opened Friday. The venerable retailer posted adjusted diluted earnings per share (EPS) of $0.06 and $2.7 billion in revenues. In the same period a year ago, it reported a net loss of $0.32 on revenue of $2.8 billion. First-quarter results also compare to consensus estimates for a net loss of $0.21 and $2.77 billion in revenue.

Same-store sales dropped 3.5% in the quarter. On a GAAP basis, J.C. Penney lost $0.58 per share, worse than the year-ago first-quarter loss of $0.22 per share.

Gross margins rose by 10 basis points to 36.3% in the first quarter. The company said that was the result of improved selling margins, partially offset by continued growth in its online and major appliance businesses.

CEO Marvin R. Ellison said:

We continue to make encouraging progress in the Company’s competitive and financial position despite our top-line performance during the first quarter. While February was a very challenging month for JCPenney and broader retail, we are pleased with our comp store sales for the combined March and April period, which improved significantly versus February. The recent sales trends, combined with the improvement in women’s apparel and our growth initiatives led by Sephora inside JCPenney, jcp.com, and major appliances, provide us with the confidence to maintain our sales guidance for the full year.

The company has guided full-year same-store sales in a range of −1% to +1%, gross margin up 20 to 40 basis points, and adjusted EPS in a range of $0.40 to $0.65. Analysts are looking for EPS of $0.46 and sales of $12.33 billion.

All in all, this report does not look too bad. Under the hood, though, there are some weaknesses. Same-store sales fell more than expected, and the GAAP net loss and loss per share were also worse. Compared with the first quarter of last year, the net loss rose be a factor approaching 3.

On top of that, 2017 is a 53-week year for retailers, compared with a 52-week 2016. The company appears to need the additional week just to stay even with last year’s inauspicious showing.

And on top of that, nearly every U.S. retailer is suffering from what analysts call an “overstored” environment. J.C. Penney is closing 140 stores this year but still expects to save just 1% to 2% in SG&A costs compared with 2016. If it has to close more stores, sales will suffer.

The stock traded down as much as 10% in Friday’s premarket but was last seen down 6.2% at $4.96, below a 52-week range of $11.30 to $5.16. The low was posted Thursday after a poor earnings report from Macy’s. Analysts have a 12-month consensus price target for J.C. Penney of $8.57.