We now have a fairly reasonable idea of how J.C. Penney's (JCP) Q3 FY2013 earnings are going to turn out based on management comments. In this article, we will look at projections for revenues, gross margin, expenses, and net loss based on historical figures combined with management commentary.
Historically, October has represented around 32% of J.C. Penney's Q3 sales, while August and September each represented 34% of Q3 sales. We know that August comparable sales were down 9.8% versus last year and September was down 4.0% versus last year. J.C. Penney reported positive comparable sales coming out of Q3, which could either mean that October was positive or that only the last week or two of October was positive and October as a whole was flat or negative. We are going to assume that October was slightly positive.
It should also be noted that historically J.C. Penney has included web sales as part of comparable sales, so the strong web sales results are included as part of these numbers.
% Chg Vs. 2012
% of Qtr Sales
Impact on Qtr Sales
This results in a projected decline of 4.37% vs. Q3 FY2012. In addition, there appears to be fewer stores this year compared to last, resulting in an additional decline of around $7 million. The combined effect leads us to project revenues of $2.792 billion in Q3 FY2013 versus $2.927 billion in Q3 FY2012.
Projecting Gross Margin
According to J.C. Penney "Gross margins continue to be impacted by lower clearance margins due to the overhang of inventory from the first two quarters of the year, higher levels of clearance units sold during the period, as well as the Company's transition back to a promotional pricing strategy during the second quarter of 2013."
Q2 FY2013 gross margins were very low at 29.6% due to the impact of similar factors. Q3 FY2012 gross margins were at 32.5%, and Q3 gross margins tend to be fairly close to Q2. We are going to estimate Q3 FY2013 gross margins at 30% based on the comments and historical figures. Management commentary indicates that Q3 FY2013 gross margins are likely lower than Q3 FY2012, although we assume that there is a slight recovery from Q2 FY2013.
This makes projected gross margin $838 million for Q3 FY2013.
Projecting Expenses And Net Loss
We are estimating SG&A at $1.05 billion, which represents a decrease of $37 million from Q3 FY2012. Interest expense is estimated at $100 million, pension related expenses at $34 million, and depreciation at $145 million. It is difficult to predict what restructuring expenses or net real estate losses or gains will be, so we will assume that those two items net out to zero this quarter.
We are therefore projected a net loss of $491 million for Q3 FY2013. Taxes are tricky to figure out and we are going to assume that there are zero taxes during the quarter, although J.C. Penney does get to carry forward a sizable net loss balance to apply against future taxes.
We do not expect J.C. Penney's liquidity to be an issue in the near term. The critical period for J.C. Penney will likely be around Q3 FY2014. Even if J.C. Penney improves sales (after factoring out seasonality) by 2 percent quarter-over-quarter and improves gross margins by 1 percent quarter-over-quarter, it is still likely to burn $1.5 billion by the end of that quarter. Combined with an expected inventory increase of approximately $700 million in Q3 FY2014 compared to Q2 FY2013 levels, that would bring J.C. Penney's cash and cash equivalents position down to approximately $120 million, all else being equal. Therefore unless sales and gross margins improve by a more significant rate than those projections, J.C. Penney will need to raise additional funds around Q3 FY2014.
Both bears and bulls should be able to agree that Q3 FY2013 is likely to be an ugly quarter for J.C. Penney, with losses of close to $500 million (barring any significant gains from real estate transactions). Where bears and bulls differ though is in the pace and timing of any actual recovery in J.C. Penney's sales and margins. A key factor will be when J.C. Penney starts showing significant signs of improvement in store traffic. J.C. Penney reported "positive off-mall traffic for the last two weeks of September, even as traffic in mall-based stores continues to be difficult." Off-mall stores represent 13% of J.C. Penney's retail space, versus 70% for mall-based stores (remainder are legacy format), so it appears that J.C. Penney was still facing some challenges in September.