Department store retailer J. C. Penney (JCP 2.74, -0.33) sinks 10.8% into the afternoon owing to a significant comparable store sales miss, first quarter sales which failed to impress, and lowered full year profit guidance.
First and foremost JCP reported a worse than expected Q1 comp of +0.2%; management gave the caveat on the conference call, though, that were it not for the impact of the colder weather in the quarter comps would have been +1.5% in Q1. Though management was encouraged by the comp sales performance for the combined February and March period, April comps ended down an unexpected mid-single digit. JCP managed to deliver significant positive comps in the last two weeks of the quarter when the weather began to normalize, allowing the company to maintain its annual comp guidance of flat to up 2%.
Management also noted on the conference call that it was encouraged that the May month-to-date sales performance which is exceeding the high-end of the company’s sales forecast.
Taking a look at the first quarter print, JCP turned in a slimmer than expected loss of $0.22 per share. Net sales dipped about 4% to $2.58 bln. This mixed print was juxtaposed against waning margins.
In the first quarter there were three major factors that negatively impacted JCP’s gross margin performance.
- First and most significant to JCP’s gross margin impact occurred within its .com business. The company experienced mixed supply chain and process issues that negatively impacted enterprise gross margin. All these issues have been identified, and process improvements are underway.
- Second, JCP executed store clearance markdowns to address slow-selling apparel categories. The company took appropriate markdowns and pricing actions in the first quarter to address slow-moving inventory and make room for new products.
- And third, JCP’s negative comp performance in women's and kids apparel created gross margin pressure. Management stated that it can correlate 100% of the negative comps in kids and women's apparel to unseasonably cool temperatures in early April.
The company also adjusted its full year 2018 earnings guidance to ($0.07) to $0.13 from the prior outlook of $0.05 to $0.25 per share. The company also continues to see 2018 free cash flow between $200-300 mn. The fiscal year can get a bit messy here as JCP adjusts for the impact of migrating to a new accounting standard.
The company implemented the new FASB accounting standard starting in the first quarter. The impact of full year adjusted earnings related to the new revenue recognition standards is expected to be about $7 million, or $0.02 per share. In addition, given the new FASB standard associated with pension accounting, JCP now includes the current service cost component of pension expense in income and SG&A. The net impact of full year adjusted earnings related to the adoption of this standard, the majority of which is related to the service component, cost component is expected to total about $32 mln, or $.10 per share.
Up against a struggling retail space and the ever-imposing presence of ecommerce (a pie which JCP continues to attempt to get a piece of) retail in general is a tough business to be in at the moment. Promotional measures and increased spending, if not held in check, could hinder margins and impact earnings. Put frankly, JCP investors can't be happy with the lowered outlook. It's likely more took to the exits this morning, as if the stock's nearly 30% losses during the past 52-week period wasn't enough to run for the hills.