J.C. Penney (JCP) provided an update on its holiday performance today that was most notable for its lack of detail. During previous updates, J.C. Penney was able to choose positive data to put in its press releases, but it appears that there was little positive to choose from for its December update. J.C. Penney did reaffirm Q4 guidance, but as we have mentioned before, the Q4 guidance numbers were achievable even with a weak performance. The lack of information from J.C. Penney indicates that it is likely still struggling to improve on -30% comparable store sales versus 2010, and reaffirms our thesis that an equity raise is very likely necessary during 2014.
J.C. Penney's Q4 guidance calls for comparable store sales to improve sequentially and year over year. The comparable Q4 2012 revenue number is approximately $3.71 billion (based on 13 week revenues of $3.721 billion less $11 million impact from closed stores).
We estimated that November 2013 sales came to $1.242 billion, based on the 10.1% same store increase versus November 2012. Therefore, to reach the minimum $3.711 billion mark needed to meet Q4 guidance would require an additional $2.469 billion sales in December and January, which represents -4.4% comparable store sales vs. 2012. By reaffirming Q4 guidance, J.C. Penney is only saying that December comps were better than -4%, a low bar to meet given that December 2012 was already likely around -31% lower than December 2010.
In reality J.C. Penney probably did somewhat better than -4% in December 2013, but the fact that they didn't mention numbers at all indicates that comparable store sales were certainly much lower than November's 10.1% comps, and also likely much lower than analyst expectations for 6.5% comps in December. Barely positive to negative comps for December is what we are now expecting.
January sales are still to come, but are usually around 1/3rd of December sales levels and thus influence Q4 numbers to a much smaller extent.
Minimum Sales Needed to Match Guidance
December / January
2012 ($ Million)
2013 ($ Million)
Comparable Store Sales (% Chg)
One minor positive for J.C. Penney investors is that J.C. Penney reaffirmed its gross margin guidance, which would indicate that Q4 2013's gross margin will be better than Q3 2013's 29.5%. However, given the heavily promotional nature of this holiday shopping season, and J.C. Penney's lack of mention of margin in its November update, we feel it is unlikely that J.C. Penney will exceed the 29.5% gross margin mark by much in Q4 2013.
SG&A expenses are expected to be below last year's levels, but that also does not tell us much since Q4 2012 SG&A numbers were inflated by the 14th week. Our model had projected Q4 losses of $266 million with stronger December sales and SG&A expenses of $1.145 billion (already $64 million lower than Q4 2012). With the lower sales expectations, we are now expecting losses closer to $300 million, although J.C. Penney's guidance still allows for a loss of up to approximately $400 million.
Ending Q4 2013 with $2 billion or more in liquidity is also an easy target to meet given that J.C. Penney entered Q4 with $1.71 billion in liquidity and still expects inventory to fall by $900 million during the quarter. Due to the reduction in inventory, J.C. Penney can still lose even the $400 million that is suggested by the bottom end of its guidance and still end up with over $2 billion in liquidity and be able to pay down a couple hundred million in merchandise accounts payable.
The lack of details in J.C. Penney's latest update indicates that December's numbers were likely quite weak and reaffirms our conclusion that J.C. Penney has been struggling to get above -30% comps versus 2010 levels. This also reaffirms our expectations that J.C. Penney will need to do an equity raise in 2014 as the rate of recovery is less than anticipated by most observers.