JCPenney (JCP) has been trading lower for much of the past year but is making a nice move higher today (+17%) after reporting Q3 (Oct) earnings. JCP reported a non-GAAP loss of $(0.33) per share, which was quite a bit better than prior guidance of $(0.45)-(0.40). Revenue fell 1.8% year/year to $2.81 bln, which was better than market expectations. JCP also reaffirmed prior guidance for FY18, sees non-GAAP EPS of $0.02-0.08. Same store comps for OctQ came in at +1.7%, resulting in a positive two-year stack of +0.9%.
During the quarter, JCP says it took aggressive actions to clear slow-moving inventory, primarily allowing for an improved apparel assortment heading in to the Holiday season. While these actions had a negative short-term impact on profitability in OctQ, the company believes it was the right decision as it transitions into Q4 (Jan).
JCP saw sequential comp sales improvement in nearly all merchandise categories in OctQ, relative to JulQ. This is giving management confidence that its overall strategy and transformation is beginning to take hold. Home, Sephora, Footwear and Handbags, Women's Specialty and Salon were the company's top performing divisions during the quarter. Geographically, the Gulf Coast and Midwest were the best performing regions of the country.
JC Penney has clearly been struggling to compete in a tough retail environment and against online rivals like Amazon. In February 2017, JCP announced it would close two distribution facilities and approximately 130-140 stores over the next few months. The idea was that this would help align the company's brick-and-mortar presence with its omnichannel network, thereby redirecting capital to invest in locations that offer the greatest revenue potential.
JCP said back in February that it believes the decision to close stores will allow it to raise the overall brand standard of the company and allocate capital more efficiently. While closing stores should allow JCP to adjust its business to effectively compete against the growing threat of online retailers, JCP believes that maintaining a large store base gives it a competitive advantage in the evolving retail landscape since its physical stores are a destination for personalized beauty offerings, a broad array of special sizes, affordable private brands and quality home goods and services.
Also, while many pure play e-commerce companies are experiencing dramatically increasing fulfillment costs, JCP said in February that it's pleased with the double digit growth of jcpenney.com and how leveraging its brick-and-mortar locations is enabling JCP to offset the last-mile delivery cost. JCP believes the future winners in retail will be the companies that can create a frictionless interaction between stores and e-commerce, while leveraging physical locations to minimize the growing operational costs of delivery. In fact, in 2016 approximately 75% of all online orders touched a physical store. Even with a reduced store count, JCPenney feels it's competitively positioned.
In sum, JCP is still struggling overall (the 130-140 stores closed this year is evidence of that) but the OctQ results were a nice reprieve. Probably the standout metric was comps coming in at +1.7% which was quite good. Granted, they did more discounting to move merchandise ahead of the holiday selling season but that was still a good number. Also, the loss was quite a bit narrower than expected. It's good to see JCP taking steps to turnaround its business but it's still early to see to if this time it will be successful.