JC Penney losses mount, missing estimates; stock craters

Key Points
  • Penney's reported a loss of 9 cents, adjusted, compared with a forecast loss of 5 cents.
  • Revenue was $2.96 billion versus an estimate of $2.84 billion.
  • Same-store sales fell 1.3 percent, worse than the expected 1.2 percent decline.
JCPenney reports big bottom line loss in second-quarter earnings
JCPenney reports big bottom line loss in second-quarter earnings

J.C. Penney's stock was in free fall Friday after the besieged retailer turned in a mixed report for the second quarter.

With earnings and same-store sales falling short of Wall Street estimates, Penney's shares sank more than 16 percent shortly in early trading, at one point hitting a low not seen since at least 1972. The stock was last hovering around $3.94.

Penney said that although the retail environment remains challenged, it sees signs of hope in the second half of the year.

Here's what the company reported versus what Wall Street was expecting:

  • Earnings per share: a loss of 9 cents, adjusted, compared with an expected loss of 5 cents, according to analysts surveyed by Thomson Reuters.
  • Revenue: $2.96 billion, compared with a Thomson Reuters consensus forecast for $2.84 billion.
  • Same-store sales: a 1.3 percent decline, compared with an expected decline of 1.2 percent.

Department stores have been tagged the laggards of retail today — with mall traffic on the decline — prompting many investors to flee at signs of uncertainty.

Penney's has tried to paint a better portrait of its future, but Wall Street isn't so easily convinced.

"While broader retail remains challenged, we are encouraged by the improved performance in our total apparel business, including a significant acceleration in kids' apparel," CEO Marvin Ellison said in a statement.

"Nearly all categories delivered improved sales results during the quarter, with our growth initiatives in beauty, home refresh and omnichannel continuing to deliver positive sales growth."

Still, Penney's net loss widened to $62 million, or 20 cents per share, in the second quarter, from $56 million, or 18 cents per share, one year earlier. Excluding one-time items, Penney's lost 9 cents a share.

Net sales climbed 1.5 percent, to $2.96 billion, beating Street expectations for revenue of $2.84 billion.

Notably impacting earnings and gross margins this quarter, Penney's completed its shuttering of 138 stores and liquidation of inventory, as planned.

"We've never liquidated this many stores at one time, so it was difficult for us to forecast the margin impact in advance," CEO Ellison told analysts and investors on Friday's earnings conference call.

"But we feel it was the right thing to do for our business. This decision will allow us to improve working capital, generate more cash flow and invest capital into more productive locations."

Penney's said its liquidation efforts, although tough to digest in the short term, helped trim excess inventory and better position the company for the remainder of the year.

"The pain of today... will turn into tomorrow's gain when the cost savings from the shuttered stores start to filter through," GlobalData Retail Managing Director Neil Saunders wrote in a note to clients.

"Although JCP's numbers are not a disaster and represent a significant sequential improvement over the prior quarter, they are nevertheless underwhelming," Saunders said. "The lack of progress on profit and same-store sales both highlight that the turnaround program is a long-term endeavor that will take some time to deliver."

Penney's weaker-than-expected comps this quarter look even worse when compared with those of retail rivals Kohl's, Macy's and Nordstrom. Those three department store chains all reported better-than-expected profit and same-store sales on Thursday.

Looking ahead and with the store liquidations behind it, Penney's has reaffirmed its outlook for the full year, except for one adjustment to cost of goods sold.

Penney's forecast for fiscal 2017 calls for comparable sales — a closely watched metric — to fall within a range of negative to positive 1 percent. It also has forecast adjusted earnings of 40 to 65 cents per share.

"We are pleased that we are off to a strong start in August for the all-important back to school season," CEO Ellison added. "We are excited by this momentum and expect to deliver improved results in the back half of the year."

Penney's said its home, fine jewelry, footwear and handbag, and Sephora beauty divisions were the top performers during the latest period.

"The company has gained customers across these segments — including younger shoppers who might previously have shunned JCP," GlobalData Retail's Saunders said about Penney's bigger push in home, footwear and fashion.

"The demographic shift is, in part, aided by the expansion and success of Sephora which continues to act as a magnet, pulling consumers into JCP stores," he added.

During the second quarter, Penney's opened 32 new Sephora locations within its stores and completed 31 Sephora expansions. By the end of the year, the department store plans to have 650 Sephora stores, which will be in about 75 percent of Penney's existing boxes.

Other initiatives in place at Penney's include adding appliances from Frigidaire to its product offering, expanding its mattress business, revamping its women's apparel line to be more "trendy" and lifestyle-focused, and rolling out more stock keeping units, or SKUs, online.

One true bright spot in its business lately, CEO Ellison said that in-store order pick-up — where shoppers first make purchases online — drives over 600,000 visits to Penney's stores each week.

"The retailer who can most effectively combine physical stores, e-commerce and simplicity will be the winner," the CEO said on Friday's conference call.

As of Thursday's close of stock trading, shares of Penney's had fallen more than 50 percent in the past 12 months and was down 43 percent this year.

JCP year-to-date performance

Source: FactSet

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