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Now that the Thanksgiving/Black Friday/Cyber Monday weekend is over, we are going to look at the news surrounding J.C. Penney's (NYSE:JCP) performance during this timeframe, as well as expectations for November. Since J.C. Penney is likely to report those numbers this week, it is important to put this out for discussion ahead of time.

November And Q4 Same Store Comps

November's same-store comps will appear positive for J.C. Penney due to the effect of Hurricane Sandy in 2012, as well as avoiding the negative effects of the decision to open at 6 am on Black Friday last year when its competitors opened at midnight.

This impact can be seen in the extremely weak Q4 2012 results, which were at 65.2% of Q4 2010 revenue. During the first three quarters of 2013, J.C. Penney has averaged 67% of 2010 revenue.
Here's an estimate of how the FY 2012 numbers break down by month, with most of the damage versus expectations happening in November due to the aforementioned factors.

FY 2012 Estimates

($ Million)

November

$1,131

December

$1,980

January

$610

We estimate the impact of Hurricane Sandy at $25 million or 2% for November 2012. Macy's November 2012 same store growth came in at 2.2% below expectations, while the average retailer had growth that was 1.7% below expectations.

The additional SG&A expense from opening the stores 10 hours earlier (and closing two hours earlier) this year should be around $10 million to $15 million. At a holiday gross margin of 25% during this period, sales would need to increase by $40 million to $60 million to break even.

FY 2013 Estimates

($ Million)

November 2012 Base

$1,131

Hurricane Sandy

$25

Earlier Opening

$40 to $60

November 2013 Total

$1,196 to $1,216

That total implies a 6% to 8% growth in November sales from just being more accessible to shoppers in 2013. J.C. Penney needs to beat that number to demonstrate any amount of actual business growth versus a November 2012 with a weak promotional strategy. If J.C. Penney's numbers fall below that range, actual business growth may have deteriorated. The overall effect of Hurricane Sandy and the late opening hours on Black Friday in 2012 are estimated at approximately 2% for the whole quarter.

We expect J.C. Penney to show around 8% to 9% growth in November same-store sales. Given the absence of destructive storms this year and the lengthened holiday shopping hours, this would indicate that J.C. Penney's base business is still at around 67% of 2010 sales levels.

How Did J.C. Penney Do On The Weekend?

The correct answer to this would be that probably nobody actually knows with any degree of accuracy outside of J.C. Penney itself. There has been both positive commentary and negative commentary as to J.C. Penney's performance over the holiday weekend. This seems similar to 2012 where J.C. Penney's performance was variously described as a bit disappointing to strong.

This continued into the holiday season, where you could still find positive commentary about J.C. Penney's holiday performance despite the actual result being a disaster. This does not mean that J.C. Penney is having a poor season now, but rather that news commentary appears to be a fairly poor predictor.

Data Points

Taking a look at various available data points doesn't appear to clear up the picture much.

Placed shows that J.C. Penney was 4th among retailers for week-over-week traffic gain on Black Friday. That is similar to last year where J.C. Penney also ranked 4th among retailers for traffic gain on Black Friday, although they used a slightly different metric.

Infoscout mentioned that J.C. Penney had a 13% department store share on Thursday and Friday compared to 11% on previous days. However, we know that J.C. Penney typically has a larger jump in Black Friday traffic than Kohl's or Sears, so department store share should increase on those days. We do not have comparable information from prior years to determine whether this year's increase is more or less than typical.

ShopperTrak points to a slight increase in "Black Weekend" sales of 1.0% to $22.2 billion this year. Apparel sector traffic was particularly strong at +9.4%, which indicates strong interest in apparel this season which could help J.C. Penney. On the other hand, Midwest sales were the weakest of any region at -2.9%, and J.C. Penney has an above-average number of stores in the Midwest.

The National Retail Federation indicated that holiday spending fell by 2.8% to $57.4 billion.

Alexa information shows that J.C. Penney's website is underperforming in terms of traffic compared to its competitors.


(Click to enlarge)

The data points so far appear pretty mixed and it is hard to draw a conclusion from them. We can probably rule out a home run or a complete disaster compared to last year, but anything else appears to be still a possibility.

A Lesson From 2012

One of the weakest arguments from some longs about J.C. Penney is that the price action over the last six weeks actually indicates improvement in J.C. Penney's business. The price action does indicate improving sentiment over J.C. Penney's future prospects, and it is true that this sort of upward momentum can last a long time. However, the price action does not reflect in either direction how J.C. Penney's business is actually doing beyond what we know from public data. J.C. Penney's momentum will need to be supported by substantial actual improvements in J.C. Penney's business at some position, and the higher J.C. Penney's stock goes, the harder the crash if its business does not show those needed improvements.

For an example of where the market misjudged recovery prospects, we only need to look to J.C. Penney in late 2012. On November 16, 2012, J.C. Penney closed at $16.28. By December 14, 2012, J.C. Penney had increased by 29% to $20.98, and ended up reaching a high of $22.47 on February 22, 2013, a few days before its Q4 2012 earnings report. Obviously the market expected a solid to strong earnings report, but the Q4 2012 earnings report was actually a disaster. That is just one recent example of how business results eventually trumps momentum and how the market often is just guessing at how business is actually going. As noted though, momentum can last for a significant and often unpredictable length of time.

Conclusion

It is hard to draw conclusions about J.C. Penney's performance from the available data around the Thanksgiving/Black Friday weekend so far. The most likely result is that November same-store sales are up by 8% to 9% versus 2012. While it may appear to be a strong result, most of that gain is due to Hurricane Sandy effects last year and competing on similar holiday operating hours to competitors this year. Probably the greatest mistake that could be made in that circumstance is to assume that comp sales will be at close to +15% in December due to the apparent trend (from -4% in September and +0.9% in October). December's comparables are significantly tougher to meet than November's and we will likely see a trend reversal then.

Source: J.C. Penney: Estimating How It Performed In November And During Black Friday Weekend