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No Comfort To Investors From J.C. Penney

August 04, 2014 | About:
Stephen Mayo

Stephen Mayo

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In Year 2013 J.C. Penney (JCP) shares plunged by 10% following a holiday update that didn't actually provide much information to investors. The update stated that "the Company is pleased with its performance for the holiday period, showing continued progress in its turnaround efforts. Customers responded well to the Company's offerings this holiday shopping season, both in store and online." J.C. Penney also maintained its outlook for comparable-store sales and gross margin to rise year over year.

However, this wasn't good enough for investors, considering that the company lost hundreds of millions of dollars in last year's fourth quarter, which is typically the best quarter for retailers. Moreover, in previous months, J.C. Penney had provided much more concrete information on its results. Investors' poor reaction shows the danger for public companies of selectively disclosing information.

Long hill to climb

On the most basic level, J.C. Penney's problem is that it needs to boost both revenue and gross margin significantly above recent levels just to reach breakeven. In the meantime, it is burning through cash quickly. Time is of the essence because the company may have trouble accessing additional capital, given its poor cash flow and already-heavy debt load.

As a result, J.C. Penney's affirmation that comparable-store sales and gross margin are rising is not enough, in itself, to convince investors that the turnaround is on track. These statistics need to improve quickly for J.C. Penney investors to do well.

A telling change

In this context, it's disturbing that J.C. Penney has been selectively providing monthly sales data. Like many other retailers, J.C. Penney stopped reporting monthly sales on a regular basis a few years ago. However, it provided investors with comparable-store sales figures for September, October, and November, in order to detail its turnaround progress. Comparable-store sales improved sequentially across those three months, from -4% to +0.9% to +10.1%.

The conspicuous absence of any December sales estimate in J.C. Penney's Wednesday update naturally led many to fear the worst. Given that the company had offered sales estimates for three straight months, why did it stop now? One compelling explanation would be that J.C. Penney took a step backward in December.

In fact, one analyst calculated that comparable store sales could have fallen as much as 6% to 7% in December while remaining consistent with J.C. Penney's guidance for comparable-store sales growth this quarter. That scenario seems a little extreme, but based on the information J.C. Penney has provided so far, it's hard to avoid the conclusion that it experienced a setback last month.

Don't play games!

There is a good argument to be made for retailers reporting monthly sales results: It keeps investors in the loop and provides an early warning signal in case performance starts to slide. There's also a good argument against retailers reporting monthly sales results: Doing so can encourage investors -- and worse, management -- to focus on short-term results rather than long-term value creation.

However, there is absolutely no reason for a retailer to selectively report monthly sales data. J.C. Penney set itself up for trouble by starting to report monthly sales numbers without having a fixed policy of always providing that information. The company is already suffering from a credibility gap, and this week's unusual "update" will only exacerbate that problem.


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