JC Penney Slashes Q3 Outlook

In an update on expected third-quarter performance, J.C. Penney Co. Inc. (NYSE: JCP) slashed its adjusted earnings per share (EPS) forecast from a prior range of $0.40 to $0.65 to a new range of $0.02 to $0.08. The company expects an adjusted loss per share of $0.40 to $0.45 in the third quarter ending on October 28.

J.C. Penney expects same-store sales for the quarter to rise by 0.6% to 0.8% and cost of goods sold to rise by 3.0% to 3.2%, primarily due to “greater sales penetration in major appliances and e-commerce and the decision to accelerate the liquidation of inventory.”

CEO Marvin Ellison explained:

Based on the encouraging results from a third quarter reset in women’s apparel, which expanded our casual and contemporary offering, we made the strategic decision to accelerate a wider transformation of the entire women’s department by clearing slow-moving inventory primarily in women’s and other apparel categories. Following this comprehensive reset, we saw an improvement in performance, particularly in our women’s division, confirming these actions were necessary to drive growth in our women’s apparel business.

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The company updated full-year guidance:

• Same-store sales: prior, −1% to +1%; now, −1% to 0%
• Cost of goods sold: prior, up 30 to 50 basis points; now, up 100 to 120 basis points
• SG&A: prior, down 1% to 2%, is unchanged
• Adjusted EPS: prior, $0.40 to $0.65; now, $0.02 to $0.08

Ellison commented:

We realize the inventory liquidation favorably impacted sales during the months of September and October; however, we expect to deliver a positive low single-digit sales comp for this period, excluding the benefit of clearance sales.  Although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the Company as we transition into the fourth quarter and fiscal 2018.  In addition, based on the way our business is growing, including continued comp sales growth penetration in major appliances and omnichannel in the third quarter, we are taking a renewed approach to aligning our expense structure to match the mix of our growth initiatives.

Investors are not as sanguine. Shares traded down nearly 6% in Friday’s premarket session, at $3.44 in a 52-week range of $3.31 to $10.74. The consensus 12-month price target on the stock is $5.81.

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