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J.C. Penney Beats Sales Goals, but Remains in Earnings Rehab

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The J.C. Penney Company (JCP) announced financial results Thursday for its fiscal fourth quarter and fiscal year 2014. Although fourth-quarter sales topped Wall Street estimates, earnings missed, sending the stock tumbling around 12 percent in after-hours trading.

In the three months ended Jan. 31, net sales rose 2.9% to $3.89 billion compared to $3.78 billion in the fourth quarter of 2013, exceeding Wall Street forecasts of $3.87 billion. Comparable store sales, including e-commerce, rose 4.4% for the quarter. Bricks-and-mortar comps rose 3.7%, while online sales through jcpenney.com were $428 million for the quarter, up 12.5% versus the same period last year.

Men’s apparel, home and fine jewelry were the company’s top performing merchandise divisions during the quarter, followed by women’s apparel, which experienced significant growth on jcpenney.com. Beauty brand Sephora inside JCPenney, now in 492 locations, also continued its strong performance. Geographically, all regions delivered sales gains over the same period last year with the best performance in the central and western regions of the country.

Gross margin improved by an impressive 540 basis points to 33.8% of sales, driven by significant improvement in merchandise mix and margin on clearance sales over the prior year quarter. SG&A expenses for the quarter were up by $28 million to $1.032 billion, or 26.5% of sales. Operating income for the quarter was $63 million, which represents a $201 million increase over last year. EBITDA was $220 million, a $197 million improvement from the same period last year.

Net income for the quarter was a loss of $59 million, or $0.19 per share, missing Wall Street’s earnings-per-share estimate of $0.11.

On the quarterly earnings conference call, CEO Mike Ullman told analysts, “We are still trying to fully recover from the self-inflicted wounds of the previous strategy,” referring to ex-CEO Ron Johnson’s unsuccessful attempt to reposition the brand as a higher-end, full-price retailer.

For the full year, total sales increased 3.4% to $12.26 billion from $11.86 billion in the prior year, driven by a comparable store sales increase of 4.4%. E-commerce sales through jcpenney.com grew $145 million to $1.22 billion for the year, increasing 13.4% over 2013.

Gross margin increased 540 basis points to 34.8% from 29.4% in the prior year. SG&A decreased by $121 million or 210 basis points compared to the prior year. Free cash flow was $57 million, a positive increase of over $2.8 billion. The company ended the year with liquidity of approximately $2.1 billion.

Ullman said in a statement, “2014 was a successful year for JCPenney. Thanks to the hard work and outstanding execution by our teams, we significantly grew sales and gross margin and delivered on our goal to generate positive free cash flow, representing a $2.8 billion improvement over last year. I am extremely proud of all that has been accomplished to restore this great company. We are back in the eyes of our customers, back running the business effectively and back on solid financial footing. We fully intend to build on this momentum and continue to significantly improve our business in 2015.”

In 2014, the company opened its first ever store in Brooklyn, New York, giving J.C. Penney locations in all five boroughs of New York City. The company opened 46 Sephora inside J.C. Penney boutiques, bringing the total to 492 locations, and announced plans to open 25 additional locations in 2015. In addition, J.C. Penney, which carries an exclusive assortment of Disney merchandise, is capitalizing on the success of its Disney-branded shops inside J.C. Penney by opening an additional 100 locations by back-to-school 2015, bringing the total to nearly 700 locations.

For 2015, the company expects 2015 comparable store sales to increase from 3 to 5 percent, and gross margin to improve by a very conservative 50 to 100 basis points versus 2014.

“We did a good job in 2014 of reconnecting and re-engaging with tens of millions of J.C. Penney customers. This year, we know we must motivate them to shop more often and shop across multiple categories to increase our share of their overall spend, even as we work to attract new customers to J.C. Penney,” Ullman said.

Some of the biggest near-term opportunities, the company feels, are in further expanding home, kids, footwear, fashion jewelry and accessories. The company is also reportedly focused on accelerating its omnichannel success in delivering a seamless customer experience via mobile, tablet, or in-store. To that end, it launched a mobile platform and new mobile app in 2014.

The company’s stock is up about 30 percent year-to-date.

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