J. C. Penney (JCP) Q1 Loss Lower Than Expected, Sales Lag

J. C. Penney Company Inc.’s (NYSE:JCP) reported adjusted loss per share of 32 cents in first-quarter fiscal 2016, narrower than the Zacks Consensus Estimate of loss of 40 cents. In the year-ago quarter, the company’s adjusted loss was 57 cents per share. Including one-time items, J. C. Penney reported quarterly loss of 22 cents per share, narrower than a loss of 49 cents in the year-ago quarter.

The company’s revenues of $2,811 million missed the Zacks Consensus Estimate of $2,922 million and also declined 1.6% year over year. The company’s top line also came in below its own guidance. Most of the retailers have posted weak top-line numbers in the reported quarter due to factors like soft consumer spending, lower spending by international tourists due to a stronger dollar and challenging retail environment. In fact, investors expressed disappointment with the company’s fiscal first-quarter top-line performance, which resulted in the company’s share price declining by 2.8% last Friday.

Comparable-store sales (comps) dipped 0.4% from the year-ago quarter. The company reported positive comps in February but reported negative comps in March and early April. However, robust sales at the company’s Sephora business cast a ray of hope in the otherwise dismal quarter.

Gross profit in the quarter fell 2.2% to $1,018 million, while gross margin contracted 20 basis points (bps) to 36.2% owing to additional discounts associated with unseasonable weather. Nonetheless, the downside was somewhat offset by progress in the company’s clearance selling margin. Further, the company’s selling, general and administrative (SG&A) expenses decreased 9.6% to $872 million.

J. C. Penney’s adjusted EBITDA improved to $153 million from $85 million in the prior-year quarter, whereas adjusted EBITDA margin expanded 240 bps to 5.4%.

Financial Details

J. C. Penney ended the quarter with cash and cash equivalents of $415 million, long-term debt of $4,388 million and shareholders’ equity of $1,250 million. Merchandise inventory levels increased 4.1% to $2,925 million.

Moreover, the company generated negative free cash flow of $421 million in the reported quarter compared with negative free cash flow of $267 million in the prior-year quarter. Also, the company incurred capital expenditures of $39 million in the quarter.

Guidance

For fiscal 2016, management expects comps growth of 3–4%. The company expects gross margin to increase in the range of 10–30 bps, down from the previous estimate of 40–60 bps. Adjusted earnings per share are likely to be positive in fiscal 2016. EBITDA is expected at around $1 billion.

At present, J. C. Penney carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the retail sector include Abercrombie & Fitch Co. (NYSE:ANF) , New York & Company Inc. (NYSE:NWY) and Shoe Carnival (LON:CCL) Inc. (NASDAQ:SCVL) . All these stocks hold a Zacks Rank #2 (Buy).