What Gave JC Penney Earnings Their Big Boost?

J.C. Penney Co. Inc. (NYSE: JCP) reported fourth-quarter and full-year 2015 results before markets opened Friday. The venerable retailer reported quarterly adjusted diluted earnings per share (EPS) of $0.39 and $4 billion in revenues. In the same period a year ago, it reported a net loss of $0.11 on revenue of $3.89 billion. Fourth-quarter results also compare to the Thomson Reuters consensus estimates for a net loss of $0.23 and $3.99 billion in revenue.

For the full year, J.C. Penney reported an adjusted net loss of $1.03 and revenues of $12.6 billion, compared with a net loss of $2.35 and revenues of $12.3 billion in 2014. Analysts had estimated a net loss of $1.20 and revenues of $12.62 billion.

Note that J.C. Penney has changed its accounting method for recognizing pension expenses and has applied the effects of that change retroactively to the periods presented in this latest report.

Same-store sales rose 4.1% in the quarter, in line with estimates. Same-store sales rose 4.5% for the year.
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Gross margins rose by three basis points to 34.1% in the fourth quarter. For the full year, gross margins rose 6.8%. J.C. Penney said that the quarterly increase was primarily driven by lower controllable costs, more efficient advertising spending and reduced corporate overhead.

In its outlook statement for 2016, the company said it expects same-store sales to rise by 3% to 4% and that gross margins will improve by 40 to 60 basis points. The company expects to reduce its SG&A spending and forecasts EBITDA of $1 billion. Adjusted EPS is “expected to be positive” and free cash flow is forecast to improve.

The consensus estimates call for a first-quarter loss of $0.41 per share on revenue of $2.94 billion. Full-year estimates include a net loss of $0.31 and $12.99 billion in revenue.

The company’s CEO, Marvin Ellison, said:

We are very pleased with our performance for the fourth quarter and full year. Our focus on private brands, omnichannel and revenue per customer is clearly resonating as we continue to win market share in a competitive environment. … While significant work remains to regain our status as a world-class retailer, the Company’s financial performance this year indicates we are on the right path to achieving our long-term financial objectives.

Revenues were higher for the quarter and for the year. Gross margins improved and SG&A were lower. J.C. Penney expects this to continue through 2016, and there’s reason to believe that will happen. The question is how long can lower costs float the boat?

SG&A for the year fell by about $220 million, but the company’s net loss was worse by $190 million. The culprit appears to be $162 million in pension expenses compared with a $48 million benefit in 2014.

The stock closed up about 8.6% on Thursday at $8.36. In Friday’s premarket session, shares traded nearly 10% higher, at $9.18 in a 52-week range of $6.00 to $10.09. Thomson Reuters had a consensus analyst price target of around $9.53 before the results were announced.