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JCP Reports Strong November Sales; Analysts Say Too Little Too Late

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J.C. Penney (JCP) is reporting strong sales for the month of November, showing signs of vitality  during otherwise troubled economic times for the mega-retailer. Still, many industry analysts expressed disappointment that its gains weren’t more impressive.

According to a JCP spokesperson, the retailer increased its sales in November by ten percent, registering a jump in same-store performance numbers for the second consecutive month. October was also touted by the company as evidence of an increasingly successful turnaround strategy; sales jumped 0.9% for October, a substantial improvement in light of the fact that September suffered a 4% decline. A company spokesperson said that the stronger performance was largely attributable to improved inventory in central private brands as well as an overhaul of the home goods department.

But many retail experts consider their progress haltingly slow, especially given the distance they have to cover to return to profitability. Speaking to Businessweek, Rick Snyder, an analyst at the Maxim Group LLC in New York, opined, “I was expecting double digits and that’s as low in double digits as you can get.” Snyder added that their only hope for JCP to affect a rejuvenation of its once thriving business is to attract considerably more store visits. “Unless they start to get incremental customers in the door, a turnaround will be very difficult. If they don’t get traffic increases, they really have no hope.” JCP provided no data on its store visits for the month of November although it has conceded that traffic was down in October despite a surge in sales, likely meaning they are succeeding in getting fewer shoppers to buy more products.

But others still feel reassured by the news of stimulated sales, especially suppliers addled with concerns that JCP’s increased sales come at the expense of gross margins, which have been hurt by an overhang of inventory from the first two quarters of the fiscal year and steep promotional discounts. Some suppliers who use third-party financing to pay for their deliveries have been confronted by tighter credit, hit by increased surcharges from some factoring companies that do business with JCP. These suppliers have continued to ship to JCP despite the additional costs and increased financial exposure partly because of the expectation that JCP’s sales are in the ascendent.

Much of Ullman’s turnaround strategy for JCP amounts to a grand undoing of the damage wrought by former CEO Ron Johnson’s disastrous tenure. Johnson deemphasized promotional discounts, reinvented the home department to focus on more expensive designers and brands and reorganized stores so products were grouped by brand rather than category. JCP is also winding down its controversial deal with Martha Stewart, which Macy’s alleged was an infringement on a preexisting arrangement it had with her company, promising exclusivity.

Still, considerable anxieties remain regarding the snail’s pace of JCP’s rebound back into profitability. Many industry analysts acknowledge that the increased sales are a good sign, but that other metrics are actually more significant portents of JCP’s future viability as a retailer.

JCP reported that it ended the quarter with $1.23 billion in cash, up from last year’s total of $525 million. It continues to carry a substantial debt load, pegged at approximately $5.61 billion.

For the fiscal period ending November 2, JCP endured a staggering $489 million loss, or $1.94 per share, compared to last year’s $123 million loss, or 56 cents per share. Thomson Reuters analysts had expected a better performance, estimating a per share loss of $1.77.

But much of the anxiety on Wall Street regarding JCP’s fiscal health is based on its access to capital, not gradually increasing sales or even improved store traffic. The prospect of a future liquidity crisis looms large for many.  Just recently, the company watched  its credit rating humiliatingly downgraded by Fitch Ratings from “B-Minus” to “CCC.”

A spokesman for Fitch said that the downgrade was issued to reflect “higher than expected cash burn in 2013.” Also, they anticipate that JC Penney, despite its recent share  sell-off, will still have to see additional funds next year. A “CCC” classification, under Fitch’s ratings system, indicates that “default is a real possibility.”

Some analysts openly wondered if November is a good month to use as a barometer of JCP’s hopes of recovery since it received a boost from extended hours over the Black Friday weekend. Also, this time last year sales were crushed by the losses incurred due to Hurricane Sandy, making a year-to-year comparison less than illuminating. Michael Binetti, an analyst at UBS, wrote in a note to clients that these specials circumstances “overstate the pace of J.C. Penney’s underlying recovery.”

 

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