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Penney (JCP) Down 11.8% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for J.C. Penney (JCP - Free Report) . Shares have lost about 11.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Penney due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

J.C. Penney Q3 Loss Narrower Than Expected, Comps Down

J.C. Penney Company third-quarter fiscal 2018 results were disappointing, as it reported a loss and year-over-year decline in the top line. Further, the company’s margins slid, thanks to inventory liquidation. To top these, the company withdrew earnings guidance for fiscal 2018.

Let’s Delve Deeper

The company posted adjusted loss per share of 52 cents, wider than a loss of 35 cents in the year-ago quarter. The Zacks Consensus Estimate was pegged at a loss of 57 cents. This marks the company’s third consecutive quarter of loss.

Total revenues in the quarter came in at $2,733 million, which declined 5.3% from the prior-year quarter’s tally and lagged the Zacks Consensus Estimate of $2,811 million.  

Further, total net sales of $2,653 million fell 5.8% year over year, due to softer sales witnessed in September and October. Credit income and other totaled $80 million, up 15.9% on a year-over-year basis, driven by functional improvement in the portfolio for credit customer.

Comparable sales (comps) during the quarter went down 5.4 %, against a rise of 1.7 % in the year-ago quarter. On a shifted basis, comps declined 4.5%, thanks to lower transactions and average unit retail.

Gross margin during the quarter contracted roughly 210 basis points (bps), on account of liquidation of slow moving and old inventory. Adjusted EBITDA declined to $46 million from $102 million in the year-ago quarter, while adjusted EBITDA margin as a percentage of total net sales fell 190 bps to nearly 1.7%.

SG&A expenses dipped 4% to $883 million in the quarter, backed by lower corporate overhead and incentive compensation.

We note that shares of the company rose 11.5% in yesterday’s session.  

Other Financial Details

J.C. Penney ended the quarter with cash and cash equivalents of $168 million compared with $185 million at the end of the year-ago quarter. Meanwhile, long-term debt came in at $4,161 million, up from $4,039 million in the year-ago quarter. Shareholders’ equity totaled $1,074 million at the end of the quarter. Merchandise inventory levels decreased 5.4% to $3,223 million.

The company reported negative free cash flow of $500 million for the nine-month period ending Nov 3, 2018 compared with negative free cash flow of $317 million in the prior-year period. Further, it incurred capital expenditures of $321 million, up from $287 million in the year-ago quarter.

Outlook

Considering the leadership transitions made by J.C. Penney, management has withdrawn previous earnings guidance for fiscal 2018 and updated the comps view. Comps for fiscal 2018 are expected to decline in low-single digits compared with the prior view of remaining almost flat. Nevertheless, the company continues to project free cash flow to stay positive.

Additionally, the company is striving to improve merchandising capabilities through improving store and online features and omnichannel strategies. Further, the company is on track with rightsizing inventory levels by eliminating excess and slow-moving inventory. Management expects that such efforts are likely to improve the company’s margin performance in the forthcoming periods. Such efforts are expected to aid a revival in the company’s performance in the forthcoming periods.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -26.76% due to these changes.

VGM Scores

Currently, Penney has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Penney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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