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Jake Berzon
Jake Berzon

JC Penney will not meet Q4 expectations

January 22, 2011 | About:

Whoever says that the dollar doesn't buy what it used to, obviously has not shopped JC Penney this quarter. JC Penney ran multiple and often stackable simultaneous promotions through December and early January. Judging by their holiday season sales results, all the efforts paid off in the form of higher top-line numbers. Revenue at stores open at least a year rose 3.7 percent in December, beating the 3.3 percent consensus analysts expectations. Customers who don't normally shop JC Penney came to snatch up some rather amazing deals.

In another desperate move, last week JC Penney shook up its senior management structure, appointing three new senior management people, including Michael Dastugue, as executive vice president and chief financial officer, replacing Robert Cavanaugh who stepped down after 32 years with the company. One of the toughest parts of Michael's job will be trading top line growth for the shrinking bottom line. His decision will have to depend on the perceived loyalty of the new found customers and the damage deep discounting did to the bottom line.

I'll use my own shopping at JC Penney as both an example and anecdotal evidence to support my thesis that the company sacrificed the bottom-line to gain the top-line in Q4. After the various discounts, instant rebates, credits, cash backs and promotions, my net spending at JC Penney online, on the phone and at the store amounted to a measly $56.92, inclusive of shipping, which was always free and after taxes. If you also take into account the value of credit card rewards earned, my net cost for these purchases was even lower. Still, it was money I would never have spent at JCP, had it not been for all the promotions.

The suggested retail value of the merchandise I purchased, however, was over $600 and included a men's wool suit, a nice dress shirt, a leather wallet, a mattress warmer, a set of bed sheets and a leather wallet. The net amount I paid JC Penney was about 1/12th of that, excluding taxes, but because of the way incentives are tracked, the miracle of accounting likely transformed my purchases into top-line revenues of at least $150 for the company.

JC Penney didn't actually see any of that money. Once all the variable costs associated with fulfilling my orders, get subtracted, JCP will be left with less than $35 to cover cost of goods they sold me, as well as a share of fixed costs and profit. That would work well for the bottom-line, if their marginal cost of goods sold approached $0, such as with many digital download products. But JC Penney sold me decent quality physical goods that they most certainly paid over $35 to procure. In fact, just the suit cost them more than $55.

My gut is telling me that in the new age of Internet shopping, the new customers who came to JC Penney for the sizzling hot deals will only stay with JC Penney as long as those deals. I also expect that the damage to the bottom line this quarter will be far more than either JC Penney management or the 14 analysts following JCP stock - on average they expect 97 cents profit per share this quarter - ever imagined.

JCP is planning to release their Q4, which ends on January 31st and annual earnings numbers on February 25th. Wish them good luck, or better yet, if you are a gambling person, buy some May puts on JCP stock at a strike price of $29 - as I write this, they are trading at $1.82.

Jake Berzon


About the author:

Jake Berzon
Visit my blog on http://stockvalues.org

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