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JCPenney (JCP) Q3 Earnings on Deck: Is Another Selloff in the Cards?

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JCPenney JCP is set to release its third quarter earnings report before the opening bell on Friday, November 15. The department store’s shares are currently down 6.7% year-to-date after a tumultuous August and September.

In the advent of digital commerce, department stores have been battered as consumers flock to digital storefronts to avoid the time-consuming hassle of shopping in malls. In response to the decline in foot traffic, mall operators have opted to fill some spaces with venues that are better suited to attract the modern consumer. But, will these efforts help revive the dying breed or is it already too late?

Department Stores Prioritize Experience 

After over a decade of declining sales, JCPenney is trying to turn things around by adapting its stores to the wants of the modern consumer. Modern consumers now prioritize experience when going out to a company’s store. Macy’s M announced in October that it would be opening four more Potbelly Sandwich Shops PBPB within its stores, adding to the one found in its Mall of America store.

Nordstrom’s (JWN - Free Report) flagship store in New York City offers the typical apparel section of a department store, with a variety of food and drink options that are bound to provide an enjoyable experience to customers in the store. The recently opened location boasts four different restaurants, two bars, and will even bring food to you while you're shopping.

JCPenney offered customers at its North East Mall in Hurst, Texas, a newly refreshed store to shop in. The department store in Hurst, Texas has been reconfigured with spacious lounging areas, a fitness studio, a cafe, a barbershop, and more. CEO Jill Soltau says the new shtick is "the fullest articulation of our brand strategy and we're going to use it as a lab."

Will It Yield Results?

A potential issue with JC Penney’s newest initiative is the demographic that the department store typically attracts. Unlike Macy’s or Nordstrom, whose shoppers are more inclined to engage with non-shopping experiences at shopping venues, the average JCPenney shopper is typically looking for value above all else.

According to data from Viant, the average JCPenney customer is 51 years old, looking for a bargain, and more likely to use a coupon. These shoppers also earn just under $63,000 per year, whereas 35% and 40% of Macy’s and Nordstrom shoppers earn more than six figures, respectively. The higher-end crowd that Macy’s and Nordstrom serves may be more inclined and receptive to in-store coffee shops and fitness studios.

The contrast in the demographic that JCPenney attracts compared to other department stores who have implemented similar features may dampen the results of JCPenney’s newest initiative. However, it is still not a guarantee that JCPenney shoppers won’t respond positively to the remodeled stores as time will tell if the store can pull itself out of its current slump.

Bottom Line

Despite the valiant efforts JCPenney has been making to rejuvenate its business, the mounting debt weighing down its balance sheet is a major headwind for the struggling retailer. JCPenney has $105 million of unsecured debt maturing in June 2020 and a disappointing holiday season could put them in a serious predicament.

Our consensus Q3 estimates call for a 5.77% earnings drop-off to a loss of $0.55 per share and a net sales decline of 7.48% to $2.53 billion. Comp sales are estimated to fall 7.25% in the third quarter as well. Fiscal 2020 estimates project earnings to plummet 29.79% to a loss of $1.22 per share and for sales to tumble 7.12% to $11.16 billion.

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