J. C. Penney (JCP 1.81, -0.60, -24.90%) hits all-time
lows this morning after delivering a worse than expected second quarter loss
and lowering its full year 2018 guidance. Perhaps JCP management said it best
on the conference call when they orated that their “results have not
Put plainly, JCP had a rough go of it in the second quarter with a wider than expected second quarter loss of $0.38 while revenue declines of 7.5% to $2.76 bln also weren’t up to snuff. Inventory at the end of the second quarter was approximately $2.8 bln, relatively flat versus last year.
What’s more, second quarter comparable store sales were up 0.3%. JCP’s stores delivered positive quarterly comp sales for the first time in two years. As a reminder, the 780 basis point spread between total net sales and comp sales was primarily due to the 141 store closures in fiscal 2017, most of which were closing late in the second quarter last year.
Management called attention to inventory management actions on the conference call, stating that it expects to reduce enterprise inventory by at least $250 mln by the end of fiscal 2019 in an attempt to better adjust its in-line, in-store and online assortment. Offering more, management highlighted its plans to shift its philosophy from buying to store capacity to buying and chasing into demonstrated sales trends. In closing, the company is taking the necessary steps to mark down and clear excessive inventory positions across many of its categories which encompasses more than just seasonal product for fashion misses.
Further, JCP started off the quarter strong in the month of May. Moving through June, the company experienced softer sales relative to the high expectations in its sales plan, and as a result, the company made the decision to accelerate markdowns and slower-moving areas of its business. The company then saw a rebound in sales in July, and ended the quarter strong with comp sales in the mid-single-digit range for the month.
Turning to the company’s outlook, comparable store sales are now expected to be approximately flat for the year. The company now anticipates an adjusted loss per share in the range of ($1.00)-($0.80), down from the previous expectation for a profit of $3.95-4.15 for the year.
Comp sales are expected to be slightly negative in Q3. Additionally, for Q3 the company expects a spread between total net sales and comp sales to be approximately 100 basis points and the spread to be 400 basis points for the full year.
LJCP now expects pressure on third quarter gross margins to continue primarily due to its inventory management efforts. However, the company believes that its other areas of opportunity can help to partially offset this pressure. This includes driving sales improvement across higher-margin apparel categories, continuing to leverage private brand capabilities, and sourcing operations, and further expanding and emphasizing its pricing analytics efforts.
Given the unexpected guidance swing to a loss on the year, investors have held back their stamp of approval for JCP's turnaround efforts. The stock's further decline to all-time lows gives credence to the cautious view the Street, and investors, have held about most retail names given their inability to adapt to changing consumer preferences. In JCP's case, management's indications are that its adaptation needs some time before it comes to fruition.
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