E J.C. Penney Q2 2017 Performance Marred By Forecasting Concerns

While it may seem like a “broken record” statement it is also the reality and that reality offers that J.C. Penney (JCP) finds itself continuing to struggle. The retailer’s quest for stability during a seismic shift in retail consumption has been a daunting challenge for the department store brand. These struggles were evidenced yet again in the retailer’s Q2 2017 results.

J.C. Penney recorded revenues of $3bn, up 2.7% YOY while beating analysts’ estimates by roughly $160 million. The headline sales growth looks relatively strong, but the underlying same-store-sales (SSS) comp still expressed negative sales growth. Same-store-sales fell 1.3% during the 2nd Quarter, improving significantly since falling 3.5% in the 1st Quarter. With J.C. Penny closing some 130 stores during the 2nd Quarter, the impact on the SSS results was 20 basis points, which would bolster the SSS comp to negative 1.1% had that operation not been found necessary.

The sales breakdown on a monthly basis is as follows: Low-single digit negative comps in May/June and approximately flat comps in July. The July comp is significant when you consider that J.C. Penney was comping against a nearly plus 4% comp from July of 2016. The strong comp for July has carried into early back-to-school selling season per management’s discussion with analysts and media participants. Sales were a mixed bag of puts and takes. Unfortunately, J.C. Penney managed to miss EPS estimates by reporting ($.09) against analysts’ estimates of ($.05) for the Quarter. And with that, the stock plunged to a new 52-week low trading price. 

J.C. Penney managed to increase units per transaction and average unit retail ticket versus the same period a year ago. Having said that, traffic was still negative year-over-year as recognized through declining transactions. On a regional basis, the Southwest and Southeast were the best-performing regions of the country and the Northeast was the worst performing region.

Margins definitely impacted J.C. Penney Q2 results, as the company did not appropriately forecast the impact on gross margins from closing some 130 stores. Other areas of the business that pressured margins relative to the retailer’s expectations were shrink and the continued growth in both online sales and major appliance businesses. Margin for the 2nd Quarter was 35.1% of sales, a decline of 200 basis points year-over-year. The liquidation events for closing stores pressured margins by approximately 120 basis points in the quarter and far more than anticipated. This was a gross miscalculation by management that likely impacted the tenure of the outgoing CFO. But all members of management should shoulder the blame. Nonetheless, the impact from store closures on the gross margin rate in the 2nd Quarter has forced the retailer to restate its forecast for gross profit margins in FY17. The previous guidance called for an increase in gross profit margins of 20-40 basis points over 2016. J.C. Penney has now adjusted this expectation downward by offering they expect the full-year margin rate to be in the guided range of down 30 basis points to 50 basis points. The worst part of this egregious miscalculation in forecasting metrics is that it seems to be an ongoing problem from J.C. Penney. The company has consistently missed its forecast for SSS over the last 5-6 quarters. Generally, such a trend finds itself negatively reflected with investor confidence and a lesser share price valuation.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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