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J.C. Penney Delivers Bottom-Line Beat in Q3, But Topline Growth Remains Elusive

J.C. Penney reported a third quarter loss that pleasantly surprised Wall Street, but failed to grow revenues amid sluggish store traffic and an intensifying competitive environment.

Total revenues fell by 0.5% to $2.76 billion, just short of analyst estimates of $2.8 billion. Comparable-store sales were disappointingly flat, and resulted in a year-to-date decline in the metric to 4.3%. Gross margin increased by 710 basis points, to 36.6% of sales, thanks to an improved merchandise mix and reduced clearance sales. Selling, general and administrative (SG&A) expense declined by $18 million.

Home, jewelry, and Sephora were the top performing merchandise divisions in the quarter. The Western and Northeastern U.S. markets fared the best among geographic regions. The company reported that store traffic took a hit in September, but improved somewhat in October and, so far, in November.

For the fourth quarter and full-year, the company expects comps to increase by 2-4 percent and 3.5-4.5%, respectively. Last year, comps grew by 2 percent in the fourth quarter, so comparisons won’t be easy.

The company sustained a net loss of $191 million, or $0.77 per diluted share, a 62 percent improvement over last year’s $500 million ($1.81 per share) third-quarter loss, beating consensus estimates of a $0.83 per share loss.

JCP is still struggling to recover from the botched repositioning masterminded by former president and CEO Ron Johnson in 2012 and part of 2013. It has spent the last year and a half implementing a turnaround plan that is part reinvention, part return to its value-oriented roots, with mixed success. Acting CEO Mike Ullman has reinstated weekly promotions and coupons in hopes of regaining some of the customers it lost to competitors like Macy’s, Sears, Kohl’s and others during the Johnson era. Last month, the company announced that Home Depot executive Marvin Ellison would be joining the company as president and CEO-designee, working alongside Ullman before taking over the top spot next year.

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The failure to deliver revenue growth in the third quarter could put the retailer’s longer-term objectives, which include the generation of an  additional $1.2 billion in sales in the next three years, in jeopardy.

JCP is not the only department store finding topline growth difficult to come by. Competitors Macy’s Inc. and Kohl’s each posted declines in both total and same-store sales for the third quarter. Sears Holdings is expected to report a more than 10 percent drop in total sales when it releases earnings Friday. Despite declining gasoline prices, which put extra discretionary income in consumer pockets, people appear to be taking advantage of the super-promotional retail environment to spend less.