Apparel and home furnishing giant J.C. Penney (NYSE:JCP) recently released its results for the second quarter (ended August 2) showing strong improvement in gross margins and adding to the investor’s confidence. Also the earnings report was solid, and it seems that the trailing retailer has been able to drag itself back from the brink of bankruptcy.
To better understand the reported numbers, let’s unravel J.C. Penney’s quarterly report card and find out major highlights.
The company’s second-quarter sales of $2.80 billion grew 5.3% from the year-ago quarter. The company’s top line was ahead of street’s $2.78 billion. The year-over-year improvement was mainly driven by 6% growth in comparable store sales and 16.7% jump in online sales. The comparable store sales growth during the quarter was a stark improvement from the 11.9% decline recorded in the second quarter 2013. The improvement was mainly due to the success of the store-within-a-store setups like Sephora.
- Warning! GuruFocus has detected 2 Warning Signs with JCP. Click here to check it out.
- JCP 15-Year Financial Data
- The intrinsic value of JCP
- Peter Lynch Chart of JCP
The store conversion, average transaction size and average unit retail for the quarter improved year over year. Sales across all U.S. regions showed strength on account of the women’s and men’s apparel businesses.
In the quarter, JCP opened 13 Sephora inside J.C.Penney locations and expanded eight locations in existing stores.
Gross margin was impressive
The gross margin jumped to 36% from 29.6% in the year-ago period. This remarkable improvement could be attributed to improved clearance sales performance.
In the quarter, the clearance sales were less than 15% of the total sales in the quarter. Moreover, the margin on clearance goods significantly improved over the previous year same quarter.
Such brisk improvement in margins have compelled the management to stay upbeat on the gross margins expectations for the third quarter which has been estimated to be at least 650 basis points higher than that achieved in the year-ago third quarter.
Operating expenses were down $104 million or 8.8%, from what was witnessed last year in the quarter. The savings was mainly from lower store expenses, reduced advertising and corporate overhead costs as well as from improvement in credit income.
For the quarter, J.C.Penney reported loss of $0.56 per share influenced by lower operating expenses. Though this loss figure might look bad on J.C.Penney’s report card; however it represents a vast improvement from $2.66 loss per share reported, a year earlier. The reported loss per share was also narrower than the street’s expectations of $0.94 loss per share.
Operating income improved $325 million for the quarter to a loss of $70 million, from $395 million reported last year, on account of significant sales improvement and efficient expense management.
Cash position is firm
The company generated free cash flow of $76 million, as against negative free cash flow of $1.15 billion in the year-ago quarter. This improvement was operationally driven by remarkable improvement in the profitability of the business and effective inventory management. J.C.Penney ended the quarter with over $1.9 billion in total liquidity and expects to generate positive cash flow for the remaining quarters with liquidity at approximately $2.1 billion by the end of the fiscal year.
J.C.Penney is on the gradual recovery path – it’s trying to reverse the sales slump through all counters and return to the profitability path. It’s incorporating measures to keep its operating costs under tight control. Although the developments noticed in the quarter are impressive, but it’ll be too early to say that J.C. Penney could return to profitability very soon.