News that J.C. Penney Co. Inc. plans to close “at least” six stores this year weighed on the retail chain’s earnings beat and fueled speculation that more JCP doors could go dark before 2020 comes to a close.
In a Nutshell: The mass merchandiser performed better than Wall Street expected, and the metrics underpinning Fiscal 2020 guidance appear in line with a company that could be on the upswing. However, it’s too early to tell how a coronavirus outbreak might dampen consumer spending and JCP’s sales. While guidance reflects promising turnaround progress, Penney’s faces headwinds ahead.
“In Fiscal 2019, we met or exceeded all five financial guidance metrics for the year, and we delivered our third consecutive quarter of meaningful gross-margin improvement in the fourth quarter,” Penny’s CEO Jill Soltau said.
The retailer said it would share more details on its thoughts about future real estate plans during Analyst Day on April 7, building on news last month that it would shutter six locations on April 24.
Moody’s Investors Service credit analyst Christine Boni sees some positive signs in JCP’s Q4 report, including inventory management she describes as “disciplined.”
“Inventories decreased 11 percent, which supported its 200 basis point gross margin improvement in the fourth quarter. Although significant operational improvement is still required to reduce leverage to more sustainable levels, J.C. Penney remains free cash flow positive with good liquidity with cash and revolver availability at approximately $1.8 billion,” Boni said.
Net Sales: For the three months ended Feb. 1, total revenues fell 7.7 percent to $3.49 billion from $3.79 billion. Included in its revenue base was a 7.7 percent decline in total net sales to $3.38 billion from $3.67 billion. The balance of revenue came in part from credit income.
The company said comparable-store sales fell 7 percent on top of the 6 percent decline a year ago. Excluding the retailer’s exit from the major appliance and in-store furniture categories, comps fell 4.7 percent in the quarter.
Earnings: The retailer posted a 64 percent drop in net income to $27 million, or 8 cents a diluted share, from $75 million, or 24 cents, in the year-ago quarter. On an adjusted basis, diluted earnings per share was 13 cents.
Wall Street was expecting a loss of 6 cents a diluted share on revenues of $3.44 billion.
For fiscal 2020, the company said it expects free cash flow to be “positive,” and guided comps in the range of down 3.5 percent to 4.5 percent. The company also said guidance “does not include any potential impact” from the outbreak of coronavirus, now officially known as COVID-19.
“Adjusted EPS of 13 cents was well above our estimate of a loss of 12 cents,” Dana Telsey, analyst at Telsey Advisory Group, said, adding that the comparable-store sales decrease of 7 percent was better that her firm’s estimate of a 7.5 percent decline.
“Looking ahead, the financial guidance for 2020 appears to reflect further metrics’ moves in the right direction,” Telsey said.
CEO’s Take: “I am encouraged by our progress, especially in our women’s apparel business. We knew it would take time to restore discipline and return growth to J.C. Penney. As we move into Fiscal 2020, we remain focused on the key tenets of retail as we continue rebuilding the company and implementing our plan for renewal,” Soltau said.