Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Summary

  • 2013 had many similarities to 2010 in terms of sales patterns. Quarter-to-quarter change in sales has been nearly identical to 2010.
  • If this pattern continues, J.C. Penney is likely to do +2% to +3% comparable store sales in Q1 2014.
  • J.C. Penney needs to demonstrate that it can escape this pattern, as 2011 ended up relatively weak, and J.C. Penney cannot afford a similar level of sales growth this time.

Although there have been assertions about J.C. Penney (NYSE:JCP) being another Best Buy (NYSE:BBY) or Rite Aid (NYSE:RAD), one of the more interesting comparisons is actually J.C. Penney in 2010 and 2011. The causes and magnitudes of the declines leading up to that period are different. However, the sales patterns, guidance and explanations for monthly sales variances during those times are strikingly similar. The question now is whether J.C. Penney can escape history repeating itself, or whether it will continue to be stuck in a repeat of the patterns from three years ago - patterns that have held true over the past year.

Similarities Between Now And 2010/2011

In 2010, J.C. Penney had stabilized its business after some significant declines due to the macro environment. In Q1 2010, J.C. Penney recorded its first quarterly same store sales increase after 10 consecutive quarters of negative comps. In 2013, J.C Penney stabilized its business after significant declines mostly under Ron Johnson. In Q4 2013, J.C. Penney recorded its first quarterly same store sales increase after 9 consecutive quarters of negative comps.

Q4 2010 was characterized by a strong November, followed by a slower December and an even weaker January. January's performance was partially attributed to weather. Q4 2013 had a strong November, followed by a weaker December and an even weaker January. Performance in December 2013 and January 2014 was attributed to weather. Below is a table with comparable store sales in Q4 2010 and Q4 2013.

Comp Sales

November

December

January

Q4

FY 2010

9.2%

3.7%

-1.2%

4.5%

FY 2013

10.1%

-0.9%

-3.6%

2.0%

February 2011's performance was strong at +6.4%. In the Q4 2010 earnings report in late February, J.C. Penney gave guidance for Q1 2011 comps of +3% to +5% and full-year guidance of low-to-mid single-digit comps. While we do not know February 2014's performance, it was solid enough for J.C. Penney to offer guidance for Q1 2014 comps of +3% to +5% and full-year guidance of mid single-digit comps during its Q4 2013 earnings report.

One of the strongest similarities between 2010 and 2013 is how sales evolved from quarter to quarter. Below is a table of revenue from 2010 and early 2011 with catalog revenue removed, as J.C. Penney was in the process of closing that channel down. The change vs. previous quarter row shows how sales changed in Q2 FY2010 vs. Q1 FY2010 for example.

Q1 FY2010

Q2 FY2010

Q3 FY2010

Q4 FY2010

Q1 FY2011

Revenue
($ Million)

$3,929

$3,938

$4,189

$5,703

$3,943

Less: Catalog Revenue
($ Million)

$135

$98

$136

$174

$54

Adjusted Revenue
($ Million)

$3,794

$3,840

$4,053

$5,529

$3,889

Change Vs. Previous Quarter (%)

1.2%

5.5%

36.4%

-29.7%

Now here is a similar table from 2013. The change from quarter to quarter is remarkably similar. Growth from quarter to quarter was slightly weaker in 2013, but had an average difference of only 0.5% per quarter. This information would also seem to indicate that the reopening of the home departments in mid 2013 had no noticeable impact in improving sales by the end of 2013.

Q1 FY2013

Q2 FY2013

Q3 FY2013

Q4 FY2013

Revenue
($ Million)

$2,635

$2,663

$2,779

$3,782

Change Vs. Previous Quarter (%)

1.1%

4.4%

36.1%

The Aftermath

February 2011's strong numbers combined with weaker numbers for March 2011 and strong numbers for April 2011. Much of that effect was attributed to Easter being much later in April in 2011 than in 2010. Part of Easter weekend fell within the March reporting period in 2010, thus 2011 had a tougher March comparison and an easier April comparison. A later Easter is seen as beneficial overall for sales. J.C. Penney ended up with +3.8% comps in Q1 2011, near the midpoint of its guidance. However, it failed to continue its momentum after initially recouping a small portion of the lost sales from the recession. Sales growth slowed (eventually ending with +0.2% comps for the whole year), and Ullman was soon replaced by Ron Johnson.

In 2014, Easter fell much later in April as well, while Easter affected the March reporting period in 2013. Thus we are likely to see a similar monthly pattern here (weaker March, stronger April) as well as some benefit from a later April Easter.

If we apply a similar -29.7% modifier to Q4 2013 sales to get to Q1 2014 numbers, we end up with sales of $2.659 billion, which represents about a 1.2% increase in comparable store sales. If we give J.C. Penney some credit for weather impact in Q4 2013 which would have artificially decreased the sales numbers for that quarter, then the projected sales total based on patterns would be $2.68 billion, or a 2% increase in comparable store sales. Another potential factor is the clearance sales to get rid of inventory at the 33 closing stores, which would have a negative impact on gross margin, but a positive impact on sales. I'm thinking that +2 to +3% comparable store sales is probably a reasonable estimate using this method.

Conclusion

J.C. Penney has been stuck following 2010 sales patterns since the beginning of 2013. A lot of people expected J.C. Penney to make a strong breakout from those patterns in Q4 2013, but that didn't occur. J.C. Penney has another chance to show that it can make a significant move out of that sales range in Q1 2014. However, if it posts comparable store sales at the low end of its guidance range, then there is a high likelihood that history is repeating itself again, threatening J.C. Penney's ability to make full-year guidance similar to 2011.

Source: J.C. Penney: Will History Repeat Itself?