JC Penney (JCP) Tops Q4 Earnings, Unveils Strategic Plans

J. C. Penney Company Inc. (NYSE:JCP) reported mixed quarterly numbers in fourth-quarter fiscal 2016, wherein earnings exceeded the Zacks Consensus Estimate but revenues marginally came in below. The company reported adjusted earnings per share of 64 cents, beating the Zacks Consensus Estimate of 61 cents and jumped 64.1% year over year.

On the contrary, the company’s total net sales of $3,961 million missed the Zacks Consensus Estimate of $3,970 million and declined 0.9% year over year, after witnessing a decline of 1.4% in the preceding quarter. Further, weakness in apparel affected the company’s overall sales. Notably, J. C. Penney’s sales have missed the estimate for the fourth consecutive quarter. Comparable-store sales (comps) decreased 0.7%. In the year-ago quarter, the company had reported comps growth of 4.1%.

Following the results, the company’s shares declined 5.8% on Feb 24. In fact, the stock has witnessed a fall of 34.2% in the past six months, underperforming the Zacks categorized Retail-Regional Departmental Stores industry which has decreased 14.7%.

Sturdy performance was witnessed across Sephora, Home, Salon and Fine Jewelry divisions. Management remains optimistic about roll out of appliances, new Sephora locations, center core refreshes, in-store.com fulfillment and buy online, pick up in store same day initiative. In the reported quarter, the company reported double-digit growth in online sales.

Gross profit in the quarter decreased 3.7% to $1,312 million, while gross margin contracted 100 basis points (bps) to 33.1%. J. C. Penney’s adjusted EBITDA improved to $449 million from $381 million in the prior-year quarter, while adjusted EBITDA margin increased 180 bps to 11.3%.

Strategic Initiatives

In an effort, to achieve sustainable growth J. C. Penney has announced strategic initiatives, wherein it will shut down two distribution facilities as well as nearly 130–140 stores over the next few months. These strategic efforts will not only help the company to align its brick-and-mortar presence but will also help the company utilize capital resources in locations where it has ample opportunity.

The closure of stores, which represents nearly 13–14% of the company’s store portfolio, is likely to hurt total annual sales by 5%. Further, EBITDA will come down by less than 2% but most importantly it will not affect net income of the company.

These stores were not only reporting dismal comps in comparison with the remaining store base but were also being operated at higher cost. The company expects annual saving of nearly $200 million from the store closure program. Moreover, in the first half of 2017, it expects to post a projected pre-tax charge of about $225 million.

Financial Details

J. C. Penney ended fiscal 2016 with cash and cash equivalents of $887 million, long-term debt of $4,339 million and shareholders’ equity of $1,354 million. Merchandise inventory levels increased 4.9% to $2,854 million.

Moreover, in the reported quarter, the company reported free cash flow of $670 million compared with $775 million in the year-ago quarter. Further, it incurred capital expenditures of $145 million in the quarter, up from $86 million in the year-ago quarter.

2017 Outlook

In fiscal 2017, the company expects comps to be in the range of down 1% to up 1%, while gross margin is projected to expand between 20 and 40 bps compared with fiscal 2016. Adjusted earnings per share are estimated to be in the range of 40–65 cents. The Zacks Consensus Estimate for fiscal 2017 is currently pegged at 49 cents.

Moreover, the company expects to generate free cash flow between $300 million and $400 million in fiscal 2017. Inventory is projected to decline by 5% or above in comparison with fiscal 2016.

Zacks Rank

At present, J. C. Penney carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Kate Spade & Company (NYSE:KATE) , Zumiez, Inc. (NASDAQ:ZUMZ) and The Children's Place, Inc. (NASDAQ:PLCE) , all these three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kate Spade & Company delivered an average positive earnings surprise of 14.6% in the trailing four quarters and has a long-term earnings growth rate of 28.3%.

Zumiez delivered an average positive earnings surprise of 30.9% in the trailing four quarters and has a long-term earnings growth rate of 15%.

The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

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