JC Penney Pares Losses through Prudent Cost Control

Comparable sales increased 2.2% during Q2 FY16, delivering a two-year stack of 6.3%

Source: Company's Website
Source: Company’s Website

Retailing major JC Penney Company Inc. (NYSE: JCP) announced its Q2 FY16 financial results on August 11th, 2016. The Plano, Texas-based company through its subsidiary, JC Penney Corporation Inc., sells merchandise such as family apparel and footwear, accessories, fashion jewelry, beauty products, and home furnishings through department stores in the U.S. As of January 30th, 2016, it operated approximately 1,021 department stores in 49 states and Puerto Rico as well as its website, jcpenney.com. The Company sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside JCPenney stores. Read more about JC Penney’s financial results below.

Q2 FY16 financial highlights

JC Penney’s Q2 FY16 earnings results bears a similarity to the earnings results of other U.S. brick-and-mortar retailers such as Macy’s Inc. (NYSE: M) and Kohl’s Corp. (NYSE: KSS), which witnessed low demand for their products owing to intense competition from big box online retailers despite store upgrades and increase of product categories. Departmental stores have reported falling profits and lower sales as shoppers turn to discount chains and online operators for their clothing and apparel needs. In response, many retailers have closed stores and reduced overheads.

During the reporting quarter, JC Penney’s revenue rose 1.5% to $2.92 billion versus the year-ago period. Comparable sales increased 2.2% during Q2 FY16, delivering a two-year stack of 6.3%. During Q2 FY16, the Company’s gross margin was 37.1% compared to 37% in the year-ago period. However, JC Penney’s profitability is expected to be hurt in FY16 due to the Company’s expansion online and into appliances. SG&A expenses for the reporting quarter decreased $48 million to $853 million, or 29.2% of sales, which is a 210 basis point improvement from the year-ago period. These savings were driven by lower overheads; incentive compensation; store controllable costs; and more efficient advertising spend.

Driven by prudent cost control initiatives, JC Penney’s losses contracted by 52% to $56 million in Q2 FY16, or $(0.18) per share, compared to losses of $117 million, or $(38.00) per share, a year prior. Excluding the write-off of unamortized debt issuance costs of $34 million, adjusted EPS improved 88% to a loss of $(0.05) per share in Q2 FY16 compared to a loss of $(0.40) per share in the year-ago period.

EBITDA grew 59%, or $85 million, to $229 million in Q2 FY16 from the same period last year. Excluding restructuring charges and the proportional share of net income from the home office land joint venture, adjusted EBITDA jumped 69%, or $95 million, to $233 million versus the year-ago period.

During the reporting quarter, Sephora, Home, and Footwear, and Handbags were the Company’s top performing divisions. Geographically, the Ohio Valley and Pacific were the best performing regions of the country.

Other highlights

J2New stores and relocation: JC Penney announced an upcoming new store in San Bernardino, California, at Inland Center, and the relocation of its store in Salinas, California, to a new space within Northridge Mall. The new store and relocation are both expected to be completed during the 2016 fall season. Each store will offer an appliance showroom, a Sephora inside JCPenney, and a flagship Salon by InStyle.

Merchandise initiatives: In Q2 FY16, the Company expanded its same-day, in-store pickup for online buyers throughout the chain, aimed at reducing shipping costs and enhancing in-house purchases by customers. Also during the quarter, JC Penney rolled out appliances across more than 120 locations and plans to expand the display of appliances in 500 stores by the end of FY16 aimed at increasing foot traffic to the stores.

As part of its focus on center core departments like handbags and jewelry, JC Penney introduced new handbag brands such a Liz Claiborne. The Company also launched MSX by Michael Strahan in 500 stores and opened 27 Sephora locations. The Company also completed center core refresh in 350 locations.

Store closures: JC Penney closed 40 stores in 2015 and 7 so far in 2016. The Company is currently negotiating the sale of its Plano headquarter campus.

New technology center: In July 2016, JC Penney announced the setting up of its technology center in India’s Bengaluru. The technology center in Bengaluru is expected to house 1,000 employees when fully operational in about two years. To start with, the Company expects to hire 450 people by the end of 2016. The center will have engineers to manage its internal IT systems, as also to develop digital, e-commerce and analytics solutions.

Revamp on track

JC Penney is going through a transformational phase amidst tough market conditions and intense market competition; the Company recognizes the need to change its department store model by resorting to digital and omni-channel retailing. Consequently, JC Penney is focusing on creating a seamless experience for shoppers across its physical stores, jcp.com, and all its digital channels. As part of these plans, JC Penney is redesigning its mobile app to allow users to pull up products easily, integrating wallet features for easy payment, and capability to save coupons and offers. The Company is also improving its website capabilities by enhancing the desktop experience, allowing greater personalization, and introducing analytics to better understand customer preferences.

J3Guidance for full year FY16

Going forward, JC Penney expects comparable store sales to increase 3% to 4% for full year FY16. Gross margin are predicted to increase 10 to 30 basis points, while SG&A dollars are forecasted to decrease versus 2015. EBITDA is expected to come in at about $1 billion and adjusted EPS is expected to be positive. The Company’s free cash flow is also expected to improve versus that in FY15.

Stock Performance

J4JC Penney’s stock ended the day at $11.15, slipping 1.24%, at the close on Tuesday, August 16th, 2016, having vacillated between an intraday high of $11.30 and a low of $11.03 during the session. The stock’s trading volume was at 17,861,773 for the day. The Company’s market cap was at $3.43 billion as of Tuesday’s close.

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