After many retailers warned about the current state of customer spending, JCPenney (JCP, Financial) looks like a very risky bet heading into earnings. With the likes of Macy’s (M, Financial) and Kohl’s (KSS, Financial) struggling in the last few trading sessions, there is no reason to expect JCPenney to do any better after it releases its earnings.
Hastening momentum
JCPenney outperformed most of its competitors throughout the holiday season as it displayed comparable sales growth of 3.9% in November and December 2015. The company is pursuing comparable sales growth of 3% to 4% for 2016, but with recent performance having surpassed that, JCPenney may well be capable of beating 4% throughout the upcoming quarter.
The company’s financial cost division has also comprehended enhancements as SG&A costs reduced 270 basis points in 2015, or $218 million, as well as gross margin surged 120 basis points. The SG&A outlay drop was considerably bigger in the fourth quarter, and saving $50 million in outlays single-handedly would be adequate.
The company’s online sales also appear to be getting better as the crowd to JCPenney’s website escalated 31% in March to 11.6 million exclusive guests. However, the bear case contrary to JCPenney would point to the company’s recent success as being centered on having gone up in contrast to easy comps.
The company’s condition has become so bad that any kind of achievement seems better than it actually is. While the company has apparently alleviated the profuse bleeding it suffered, competitors like Walmart (WMT, Financial) and Target (TGT, Financial) can still create problems for the company.
Upcoming quarter
It was recently warned that JCPenney’s sales dipped in the month of April, and the expense slashes in the last weeks of April point toward a bad earnings report. Centered on how other companies have fared in April, feebler April sales may have exaggerated quarterly figures by 1% to 2%.
This would turn into an undesirable influence on gross margin of around $10 million to $20 million. Therefore, the cost-reducing actions can most likely result in the company meeting its quarterly EBITDA goal regardless of a miss on the revenue front.
However, a dip in sales will not go down well with investors as JCPenney’s turnaround had just started gaining momentum.
Conclusion
After Macy’s earnings and Kohl’s warning, JCPenney looks like a very risky bet and is a stock that investors should avoid going into earnings.
