It has been about a month since the last earnings report for J.C. Penney . Shares have added about 19.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Penney due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
J. C. Penney Posts Q1 Loss
J. C. Penney Company posted its first-quarter fiscal 2019 results wherein the bottom line missed the Zacks Consensus Estimate, while the top line surpassed the same. However, both the metrics declined year over year.
Notably, the company reiterated its guidance for fiscal 2019, wherein free cash flow is likely to be positive.
Let’s Delve Deeper
The company posted adjusted loss of 46 cents, wider than a loss of 22 cents reported in the year-ago quarter. Moreover, the figure compared unfavorably with the Zacks Consensus Estimate of a loss of 39 cents.
Total revenues (including total net sales and credit income and other) in the quarter came in at $2,555 million, which declined 4.3% from the prior-year quarter’s figure but exceeded the Zacks Consensus Estimate of $2,549 million.
Total net sales of $2,439 million fell 5.6% year over year due to soft performance of home, women's accessories and handbags categories. However, fine jewelry, and children's, women's and men's apparel categories performed well.
We note that credit income and other totaled $116 million, up 33.3% on a year-over-year basis, driven by functional improvement in the portfolio for credit customers.
Comparable sales (comps) during the quarter declined 5.5%. This can be attributed to the company’s exit from major appliance and in-store furniture categories, which took a toll on comps to the tune of 20 basis points (bps).
Gross margin contracted roughly 50 basis points (bps) on account of liquidation of slow moving and old inventory. Nevertheless, the company witnessed higher sell-through rates in all product categories during the quarter, along with increased selling margins in most merchandise divisions. Encouraged by this, management projects gross margin to improve in fiscal 2019.
Adjusted EBITDA declined to $74 million from $151 million in the year-ago quarter, while adjusted EBITDA margin shrank 280 bps to 3%.
SG&A expenses rose 3.6% to $856 million and SG&A expenses as percent of sales expanded 310 bps to 35.1%. SG&A costs were hurt by additional charge related to home office lease of nearly $5-million.
Other Financial Details
J. C. Penney ended the quarter with cash and cash equivalents of $171 million compared with $181 million in the year-ago quarter. Meanwhile, long-term debt came in at $3,826 million, down 7.6% from $4,142 million in the year-ago period. Shareholders’ equity totaled $1,034 million at the end of the quarter. Merchandise inventory levels decreased 16% to $2,477 million.
The company used free cash flow of $268 million for the year ended May 4, 2019, while it used free cash flow of $421 million in the prior-year period. Further, it incurred capital expenditures of $71 million during the quarter.
J. C. Penney has repeatedly failed to bring fashionable and trendy brands, thereby losing customers. Further, the company is reeling under a huge debt load, which is due 2024 end. It is also bearing the brunt of the escalating U.S.-China trade war. In fact, any significant increase in tariffs on imports from China may negatively impact J. C. Penney’s private and national brands.
As part of the company’s turnaround efforts, CEO Jill Soltau has made significant changes in leadership. The company launched a new store checkout process during the reported quarter. In this regard, it has already tested a centralized pickup and returns area concept. For the second quarter, management plans to expand this new concept to nearly 500 stores.
Also, the company exited major appliance and in-store furniture categories to focus more on its apparel business. This move took a toll on comps in the reported quarter. This apart, it has been shutting down underperforming stores and revamping the existing ones to revive sales and profits.
Notably, J. C. Penney is on track to shut down all its full-line stores, out of which three full-line stores have been closed in the reported quarter. It anticipates to close the remaining 15 full-line stores along with most of the ancillary Home and Furniture stores in the second quarter. Moreover, the company’s prime focus is to improve inventory and enhance the apparel business.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.12% due to these changes.
At this time, Penney has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Penney has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.