J.C. Penney Q1 2017 Preview: What To Look For
Retail earnings and sales results will come into focus this week and remain in focus through the following week as many of the top retail brands begin reporting their Q1 2017 results. Some of the first names reporting this week will be Macy’s (M) and Kohl’s (KSS) on 5/11/17. Following in their footsteps will be J.C. Penney (JCP) on 5/12/17. J.C. Penney, like many of the retail names has seen its share price slashed since last reporting underperforming quarterly results. With the stock trading at near trough levels, investors are hoping for a better overall, retail reporting season and one that shows J.C. Penney’s efforts are proving incremental. But that will be a tall task for the department store retailer given the slow-going Q1 period for department store retailers and economic activity overall.
The 1st Quarter GDP results were quite poor, showing just .7% economic growth. Throwing salt on an open wound in the retail sector, the Census Bureau has found retail sales providing very little stimulus to overall economic activity as the months of February and March both showed a decline in total retail sales.
Sales at retailers nationwide declined 0.2% last month, mostly because of cheaper gas and incentives by car dealers and slower-than usual issuances of tax refunds. To make matters worse, the February retail sales results were revised lower from a .1% to negative .3 percent. That’s quite the revision and largely unexpected by most economists.
J.C. Penney is in a tough spot after several years of improving metric performance. The company has had outsized revenue and same-store-sales (SSS) growth over the last few years and since the departure of the former CEO, Ron Johnson. But all of that growth may have come off of an extremely low base, as any modest improvement to the shopping experience would have brought the consumer back to the retailer. What occurred at J.C. Penney in 2016 was likely foreseeable, as the company seemed to hit a brick wall with sales results although profitability improved greatly. But now and more importantly is the direction for which the retailer takes from that point. In 2016, after forecasting greater than 3% SSS growth, the company’s sales fell flat while expressing negative SSS in 3 out of 4 quarters. Most importantly may have been J.C. Penney’s Q4 2016 results, which showed a lack of improvement as SSS fell .7% during the quarter and with the touted addition of appliance sales. While appliance sales were notably strong for the retailer, this comes off of absolutely no comparable sales and at the expense of profits as noted by CEO Marvin Ellison.
Another sore spot during the Q4 2016 period for J. C. Penney was gross margin performance. The company was up against a heavily promotional retail environment and was forced to increase couponing. The rollout of the appliance business as well as continued consumer shift to its online business both negatively impacted gross margins. Overall foot traffic was lighter and thus gross margins contracted during the quarter by 100 bps. It’s important to note that J.C. Penney had previously forecasted a boost to gross margins. For the year, gross margin decreased 30 basis points to 35.7% of sales. Not at all what the retailer forecasted at the onset of 2016.
As J.C. Penney’s has completed the Q1 2017 period and began installing initiatives to improve upon last year’s shortcomings, the stock price has moderated lower through the Q1 period. Guidance fell short of analysts’ expectations for the Q1 2017 period and it remains to be seen as to whether or not the retailer can jump over a rather low metric bar. The company offered the following guidance upon releasing Q4 2016 results and as it pertains to FY17.
As such for fiscal 2017, comparable store sales are expected to be down 1% to up 1%. Gross margin is expected to be up 20 basis points to 40 basis points versus last year. SG&A dollars are expected to be down 1% to 2% versus last year and adjusting earnings per share is expected to be in the range of $0.40 to $0.65.
What I believe we will see coming from J.C. Penney in the 1st quarter of 2017 will be negative SSS, but with improving sales performance as the quarter progressed and month-over-month. Essentially, the early part of the quarter will have proven too difficult to overcome on the whole of the quarter but each month positively progressed. As such it will be up to management to color this performance appropriately in order to gain the confidence of investors.
During the back half of 2016, women’s apparel faltered for J.C. Penney. Women shoppers make up roughly 70% of the retailer’s customer base and as such, the company has offered to fix its women’s apparel business poste haste. The addition of Nike (NKE) and Adidas brands as well as expanding and improving the Sephora footprint at J.C. Penney locations all aim to right which has ailed women’s apparel sales at J.C. Penney. I would expect to hear a good deal about this effort from management on the conference call.
Online sales will also likely continue to show double-digit growth for J.C. Penney in the Q1 2017 period. In 2016, the retailer greatly increased the number of SKUs offered through its dotcom site and has vowed to continue with increasing SKUs in 2017. In fact, in Q1 of this year, J.C. Penney offered plans to increase online SKU assortment by over 140% versus last year. Two aspects of this operation are being identified in this improvement. First, J.C. Penney’s online business obviously fails to compare to its peers in both quality and quantity, as the company doesn’t even rank in the top ten of online department store or apparel retailers. Secondly, while growing its online sales business by double-digits in each of the last 3 years, it simply isn’t enough to offset underperformance in its brick and mortar business. J.C. Penney’s storefronts account for over 92% of its business to date.
Last but certainly not least, the bar has been set very low for J.C. Penney and by the company’s own admission. CEO Marvin Ellison expressed as much during the Q4 2016 Conference call with analysts and investors alike, denoting a conservative approach to 2017 guidance. Having said that, the impact from delayed tax returns during the quarter have already found their way into the overall impact on Q1 2017 economic activity. As such, while J.C. Penney has/is expecting some improvement in the 1st quarter of 2017, that improvement may be masked by less transactions and still yet lower same-store-sales on a YOY basis. Again, Mr. Ellison expects as much as he offered the following:
Marvin R. Ellison - J. C. Penney Co., Inc.
No. It's early. What we can say is our guidance of negative 1% to plus 1% is something that we feel we can achieve. We think Q1 would be on the lower end of the guidance, but we feel very confident that we'll be able to achieve our guidance for 2017.
It remains to be seen just how much the tax return issue plagued the retailer during the 1st quarter, not to mention its peers when they report. But more importantly, it remains to be seen just how well the numerous initiatives the company has commenced are benefiting the brand. Moreover, the announcement of store closings earlier in the Q1 2017 period begs of updating so as analysts and investors can update their sales and profit models respectively. J.C. Penney announced its plans to close between 130-140 stores recently and through FY17, but has since delayed the rollout of this activity. I’m sure the company will provide greater clarity on this front during the Q1 2017 Conference Call as well.
I’m a J.C. Penney customer and credit card holder. As an analyst I frequent stores around the country in search of data points. In 2016, I went from a Hold rating on the stock to a Sell rating, removing my price target in kind. J.C. Penney needed to prove much more to me in 2016 than the simplicity of jumping over multiple years of depressed comps. Unfortunately, the company fell short of its 2016 targets as sales fell flat. While total profitability had improved last year, the stock was still found depreciating as the environment for retailers greatly depends on strength of sales. Going forward, this will be no less an obstacle for J.C. Penney than it was in 2016 and as such investors would be wise to pay close attention to sales results and the coloring of sales initiatives provided by management.
The Final Word
Shares of JCP have been slowly depreciating for the better part of the last 90 days and since last reporting negative SSS results. While I don’t believe sales have greatly improved, the stock price may already be “baking in” a worst-case scenario. As such, anything less than a worst-case scenario may provide a near-term boost to the share performance. The stability in that move, however, will depend on the verbiage surrounding sales and as offered by management. Additionally, depending on the severity of store closings and FY17 updated guidance; shares of JCP may moderate the share price performance over the subsequent 90-day period. Presently, JCP has greater than $2.5bn in liquidity and is of no going concern, unlike other retail names that are filing for bankruptcy and shuttering operations.
Disclosure: