J.C. Penney Sales Slide, Lower Earnings Loss Not Enough

Same-store sales were flat in the quarter. The consensus estimate called for a gain of 3% against a very weak prior two years, and this was the best the store could do. Combined with the revenue miss, the stock is likely to take a beating after-hours on Wednesday and when trading begins again on Thursday.

Gross margins were rose from 29.5% in the year-ago quarter to 36.6% in 2014. This is slightly better than the 36% gross margin in J.C. Penney posted in the second quarter. This means that the impact of clearance sales was basically no worse than in the preceding quarter.

J.C. Penney said that same-store sales are expected to rise 2% to 4% in the fourth quarter of 2014 and gross margins are forecast to rise 5% to 6%. For the full year, same-store sales are forecast to increase by 3.5% to 4.5% and gross margin is expected to rise by 5% to 6%. Free cash flow for the year is expected to be positive, and liquidity is forecast to rise from $1.9 billion now to $2.1 billion by the end of the fiscal year.

The consensus estimates call for fourth-quarter EPS of $0.13 on revenue of $3.88 billion. Full year estimates include an EPS loss of $2.56 on revenues of $12.29 billion.

The company’s CEO said:

This quarter shows the progress we are making in the final phase of JCPenney’s turnaround. … Like most retailers, following a strong start to the back-to-school season, sales did slow in September and October as unseasonably warm weather hindered the sale of fall goods.

The company’s lower-than-expected loss is welcome news, but the company has beat the loss estimates now in four consecutive quarters and nothing else has changed much. Sales were short of last year’s total and below estimates. Flat same-store sales is the number that J.C. Penney needed to improve and it didn’t. Warm weather may have hurt, but how the store handled it is the issue.

The stock closed up nearly 8% on Wednesday at $7.76 and dropped nearly as much after hours. About half-an-hour after the market closed, J.C. Penney shares were trading down about 2% at $7.59 in a 52-week range of $4.90 to $11.30. Thomson Reuters had a consensus analyst price target of around $8.60 before the results were announced.

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