J. C. Penney (JCP, Financial) reported mixed results in the last quarter of 2017, after witnessing a series of quarters of weak performance. The retailer’s earnings outpaced analyst expectation but revenue and same-store sales lagged estimates. Company stock tumbled 12% following the holiday quarter results. Here’s a lowdown of the fourth quarter to assess reasons for the stock decline.
The stock fall
J. C. Penney has been struggling in the past several quarters. Though the company has been putting in effort to see a turnaround, which has been paying off, certain factors had a negative impact on the stock price. The company reported lower-than-expected revenue and same-store sales. J.C. Penney’s profit margins were negatively impacted by greater online sales since the company invested less in promotional activities to reduce inventory.
The retailer also gave a soft outlook for 2018. In addition, the company expressed its plan to trim 360 positions, which includes a staff cut to corporate headquarters, as well. It is expected that this rightsizing will help the company annually save around $25 million. These factors combined led to the drop in the stock price.
Digging deeper into the numbers
J.C. Penney generated revenue of $4.03 billion, up 1.8% from last year, but a tad short of analysts’ estimate. The retailer registered net income of $254 million, which translates to $0.81 a share, compared with $192 million, or 61 cents a share, reported a year ago. The company benefited by as much as $75 million during the period, thanks to the new U.S. tax legislation. Excluding non-recurring items, the company said it earned $0.57 a share, which is $0.10 north of Street estimates.
During the period, J.C. Penney attained same-store sales improvement for the second consecutive quarter. This compares with a 2.4% comparable sales drop in the first half of fiscal 2017. The company saw same-store sales gain of 2.6% in the fourth quarter, which assisted it to post a tiny 0.1% comparable sales improvement for the entire fiscal.
J.C. Penney generated $213 million in free cash flow, which is attributable to the improving working capital and the disposal of a distribution center in Buena Park, California. The cash flow helped J.C. Penney to significantly offload its 2017 balance sheet as it used cash on hand and free cash flow to lower its debt by almost $600 million. The company also repaid another debt by $190 million last month. The company’s current debt stands at less than $4 billion relative to $5.6 billion four years ago. This has helped the company lower its interest burden considerably.
Ongoing turnaround effort
J.C. Penney has been working on several fronts as part of its turnaround strategy. It includes lowering extra apparel inventory, closing down its nonpaying outlets and expanding private-label lines. These efforts appeared to be paying off the retailer in the last quarter, which is evident from the 2% rise in same-store sales ahead of the holiday season.
J.C. Penney has also gained market share of appliances since Sear Holdings (SHLD, Financial) has been shutting down its stores. The Texas-headquartered company is also witnessing continuous growth in its beauty segment that includes hair salons, Sephora makeup stores and jewelry.
J.C. Penney recently proposed its plan of shutting down one of its distribution centers, which would result in the elimination of more than 600 jobs. The company will also be closing eight stores in the current year. In 2017, it had closed more than 100 stores. Penney also confirmed its plans to trim 130 roles at its headquarters, and 230 positions from its stores. The remaining store workers will be rearranged to other customer-facing positions to streamline operations and manage omnichannel initiatives.
Looking ahead
For fiscal 2018, the company has given a guidance of flat to 2% growth in comparable store sales. J.C. Penney projects cost of goods sold to reduce slightly compared with last year. However, it should be noted, the company is expected to experience 40-60 basis points rise in the metric in the first quarter of fiscal 2018. The second and third quarters should see a drop in cost of goods sold. Adjusted earnings per share should come in the range of $0.05 to $0.25 compared with $0.22 in fiscal 2017.
Disclosure: I do not hold any position in the stocks discussed in this article.
