J.C. Penney Beats, Sales Depress - Analyst Blog

J.C. Penney Company Inc. (JCP), a leading retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, recently delivered better-than-expected third-quarter 2010 results on the heels of growing online sales and effective cost management.

The quarterly earnings of 19 cents a share beat the Zacks Consensus Estimate of 17 cents, and shot up 72.7% from 11 cents delivered in the prior-year quarter. The Zacks Consensus Estimate had dipped by a penny in the last 7 days, prior to the earnings announcement, as the company's preliminary sales results fell short of management's guidance.

The shares of J.C. Penney fell 2.6% or 82 cents to $31.40 in pre-market trading.

Behind the Headline

The quarterly sales of $4,189 million missed the Zacks Consensus Estimate of $4,227 million but rose marginally (by 0.2%) from the prior-year quarter. Management had expected sales growth between 1% and 2% for the quarter. Total sales were adversely affected by the discontinuation of the publishing of Big Book catalogs. Online sales through jcp.com grew 3% to $361 million in the quarter.

Comparable-store sales grew 1.9% during the quarter, as against management's target of 2% to 3% growth.In order to drive sales and improve traffic, J.C. Penney added ‘Liz Claiborne', ‘MNG by Mango' and ‘Call it Spring' brands to its portfolio.

The company's gross profit fell 3.6% to $1,635 million, whereas gross profit margin contracted 160 basis points to 39%. Management expects margin to drop moderately in fourth-quarter 2010 from the prior-year quarter.

The in-store Sephora departments continued to outperform in drawing younger and more affluent customers. During the quarter, J.C. Penney opened 16 Sephora stores, and plans to have 231 stores at the end of the year. The Sephora concept is expected to be a significant revenue driver.

Management Forecasts

The Plano, Texas-based retailer, J.C. Penney, now expects fourth-quarter earnings between 90 cents and $1.00 per share. The company reaffirmed its fiscal 2010 earnings guidance range of $1.40 to $1.50. The current Zacks Consensus Estimates for the fourth quarter and fiscal 2010 are 94 cents and $1.43, respectively, and dovetails with management's earnings forecast.

For fourth-quarter 2010, management guided total sales growth of 1.5% to 2.5%, whereas comparable-store sales growth in the range of 3% to 4%. For fiscal 2010, J.C. Penney reiterated its comparable-store sales growth expectation in low-single digits.

Other Financial Details

J.C. Penney ended the quarter with cash and cash equivalents of $1,666 million and long-term debt of $3,099 million, reflecting a debt-to-capitalization ratio of 38.5%, and shareholders' equity of $4,941 million. The company deployed $380 million toward capital expenditures, and generated negative free cash flows of $707 million in the first nine month of fiscal 2010.

Our View

We believe the stock will remain under pressure in the near term. Despite the introduction of new product lines, sales performance has not been impressive. J.C. Penney hinted that the discontinuation of Big Book catalog publishing has hampered the sales. Although the in-store Sephora shops inspire confidence, a consistent improvement in the stock is yet to be witnessed. Consequently, we have an ‘Underperform' rating on the stock. However, J.C. Penney holds a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation.

J.C. Penney, which competes with Macy's Inc. (M) and Kohl's Corporation (KSS), currently operates more than 1,100 department stores in the United States and Puerto Rico. The company also operates one of the largest apparel and home furnishing sites, jcp.com, and general merchandise catalog business.