JC Penney (JCP) Earnings Preview: Q3 2014 Sees Larger Losses But Online Sales, Other Trends Improving

J.C. Penney Company Inc. (NYSE:JCP) is expected to report a third-quarter loss that is more than double what it booked a year ago as efforts to turn around the struggling mid-tier department store chain forced it to accept tighter gross profit margins. Nevertheless, the retailer’s trajectory appears promising.

The Plano, Texas, company, which reports Wednesday before the markets open, is expected to announce a loss in net income for the three months ended Nov. 3 of $446.8 million compared with a loss of $203 million in the year-ago period, according to analysts polled by Thomson Reuters. Analysts expect a loss of $1.64 per share on revenue of $2.81 billion, compared to a loss of 56 cents per share on revenue of $2.93 billion in the year-ago period.

J.C. Penney operates 1,100 stores in 49 states and Puerto Rico and has suffered recent losses in sales largely due to extensive renovations to its home-goods section and then its flopped remerchandising and attempt to go up-market under former CEO Ron Johnson. Johnson eliminated sales promotions and popular private-label brands. In April, Myron Ullman, who served as CEO before Johnson, replaced him.

Inventory overhang from the first two quarters of Penney's fiscal year, which ends in Feb. 1, 2014; higher levels of clearance units sold; and the company’s transition back to a promotional pricing strategy dragged down gross margin.

Last month J.C. Penney brought back discount coupons, after eliminating them and other sales promotions in February 2012. After that move in February, same-store sales fell 25 percent in J.C. Penney’s 2013 fiscal year, and the percentage of customers who entered a store and made a purchase declined 13 percent and 9 percent, respectively, according to an October S&P Capital note.

The company is now returning to its former promotional pricing strategy and reintroducing popular private-label brands that were dropped earlier in the year, and the effects have been evident in sales and traffic.

In October, sales improved 0.9 percent compared with September. Online sales increased 37.6 percent in October compared to October 2012, with home sales up 50 percent and contributing to half of all online sales. Trends improved in home, women’s accessories and men’s apparel.

“Back-to-school started well, online sales have improved considerably, basic assortments are being rebuilt, the clearances problem should diminish and give way to improved gross margins as sales of private brands of apparel improve,” Bernard Sosnick, an analyst at Gilford Securities, said in an August note. “Ron Johnson’s concept for the home department is a bust, but the cost to extricate from the merchandising misdirection might be less than we anticipated.”

“Heading into the holiday season, we see JCP in a much stronger position to compete this year both on product and pricing,” analysts said in an S&P note Nov. 7.

Gilford Securities agrees.

“To us the turnaround story seems simple,” Sosnick said in an October note. “Ron Johnson was so misguided that reversing his actions should largely cure Penney’s problems. But, there is no magic wand. Correction takes time, mainly because months are required to rebuild inventories of basics and to bring back private brands that were dropped.”