What To Watch In J.C. Penney Earnings Report

J.C. Penney (JCP) is scheduled to report results of its third fiscal quarter before the market open on Friday, November 10, with a conference call scheduled for 8:30 am EDT.

What to watch for:

1. TURNAROUND EFFORTS: Analysts and investors will listen for comments from the retailer on its cost cutting moves. Last year, J.C. Penney reduced payroll, froze overtime and took other major cost cutting steps as it faced “an expense challenge.” J.C. Penney management has said the company would continue to be “aggressive” on cost cutting. In late October, Citi analyst Paul Lejuez said the retailer’s strategy “has not gained traction in any cohesive way” and doesn’t see things getting any easier in the current environment. The analyst does not see any near-term liquidity issues, but notes Penny’s “high debt burden” means that the value of the company sits with the debtholders, leaving “less and less” for equity holders as free cash flow estimates continue to go lower. 

2. COMPETITIVE LANDSCAPE: Mall-based retailers, including J.C. Penney, have been hurt by the increasing popularity of fast-fashion retailers like Zara, Forever 21 and H&M. The current promotional environment as well as tourism sales and a shift to e-commerce has been a focus for many retailers as of late. Morgan Stanley’s Kimberly Greenberger said that her firm’s latest apparel survey lends support to her belief that Amazon (AMZN) is quickly gaining traction at the expense of department stores. Dwindling mall traffic and Toys ‘R’ Us’ recent bankruptcy filing risk derailing high-end retailer Nordstrom’s (JWN) efforts to go private, sources said. While Macy’s (M) and Kohl’s (KSS) said hurricanes and unseasonal weather impacted sales, Macy’s Q3 EPS beat expectations and backed guidance, while Kohl’s said it had a strong back-to-school shopping season.

3. OUTLOOK: Last month, J.C. Penney said it expected to report an adjusted loss per share of (45c)-(40c) for the current quarter, well below analysts’ estimates. Following accelerated actions to liquidate inventory in women’s apparel, the retailer slashed its FY17 adjusted EPS view to 2c-8c from 40c-65c and comp sales view to down 1% to flat from down 1% to up 1%. Chairman and CEO Marvin Ellison stated that “based on the encouraging results from a Q3 reset in women’s apparel…, we made the strategic decision to accelerate a wider transformation of the entire women’s department by clearing slow-moving inventory primarily in women’s and other apparel categories.” He noted that “following this comprehensive reset, we saw an improvement in performance, particularly in our women’s division.” The retailer said the inventory liquidation favorably impacted sales during September and October, and that “although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the company as we transition into the fourth quarter and fiscal 2018.” Citi’s Lejuez cited J.C. Penney’s weak Q3 preannouncement as “a reminder of just how challenging the department store space is.”