J.C. Penney: You Can't Tell How Well It Did In Q1 From Going To The Stores

| About: J.C. Penney (JCP)

Summary

The difference between a great Q1 and a poor Q1 for J.C. Penney is no more than 11%. We can't easily distinguish between the two when observing a store.

That 11% difference amounts to four transactions per average hour in an average 100,000 square foot store.

Time of day and day of week has a huge influence on store traffic. Store traffic at 3pm on the weekend is 90% greater than at 3pm on a weekday.

Individual stores also vary greatly. A 75th percentile store may have 44% more sales per square foot than a 25th percentile store.

As we get closer to J.C. Penney's (NYSE:JCP) Q1 earnings report, there are increasing number of posts here and on other message boards about various visits to J.C. Penney stores and how the stores were either very busy or empty. These store visits are actually extremely unreliable as a predictor of J.C. Penney's Q1 performance though. Store observations are mostly influenced by time of day/week, relative store strength, staffing levels, and random variation. Any actual change in J.C. Penney's sales performance compared to last year is going to be dwarfed and undistinguishable by those other factors unless one has properly controlled for it. One side may be right about J.C. Penney's Q1 sales performance, but that will be due to reasons other than store observations.

The Difference Between A Poor And A Great Q1

Here's the difference between a poor Q1 for J.C. Penney and a great one. Both numbers below are outside the range of analyst estimates listed on Yahoo Finance and represent -1% and +10% same store growth respectively. Based on an average transaction size of $75, the average J.C. Penney store will do 34.8 transactions in an average hour in a poor Q1 versus 38.7 transactions per hour in a great Q1. The difference amounts to one transaction every 15 minutes in a 100,000 square foot store. The difference is marginal. A store that looks busy to someone in a great Q1 would have also looked busy to that person in a poor Q1. A store that looks empty to someone in a poor Q1 would have also looked empty to that person in a great Q1.

 

Poor Q1

Great Q1

Sales ($ Million)

$2,600

$2,890

Sales Per Store ($ Million)

$2.38

$2.64

Sales Per Store Per Day ($)

$26,116

$29,029

Sales Per Store Per Hour ($)

$2,612

$2,903

Transactions Per Store Per Hour

34.8

38.7

Click to enlarge

Whether a store appears busy or empty is not due to J.C. Penney either doing well or poorly in Q1, but rather due to other factors such as the time of visit, the visited store's relative strength among J.C. Penney's stores, staffing levels and random traffic variations outside of those factors.

Effect of Time of Day

The time of day and week that one visits a store probably has the most influence on whether it is busy or not. A random J.C. Penney store (Valencia Town Center) has typical opening hours of 10am to 9pm on Monday to Friday, 10am to 8pm on Saturday and 11am to 7pm on Sunday. Below is a table detailing the percentage of Americans who are out shopping during relevant times of the week. There are 30% more people shopping at 3pm on a weekday than at 5pm on a weekday. There are 15% more people shopping at 5pm on a weekday compared to 7pm on a weekday. There are 90% more people shopping at 3pm on the weekend than at 3pm on a weekday.

Time

Weekends

Weekdays

10am - Noon

7.7%

5.2%

Noon - 2pm

11.2%

6.2%

2 - 4pm

11.6%

6.1%

4 - 6pm

7.3%

4.7%

6 - 8pm

4.6%

4.1%

8 - 10pm

 

2.3%

Click to enlarge

Source: National Real Estate Investor

The magnitudes of those differences are significantly greater than the difference between a great quarter and a bad quarter for J.C. Penney. Even the difference between visiting at 3pm and 5pm on a weekday will cause nearly three times as much difference in traffic and transaction levels than the gains J.C. Penney can make in a great Q1.

Effect of Individual Stores

The variance in sales between individual J.C. Penney stores is also very substantial. A sample of 34 J.C. Penney stores included in 2013 CMBS deals showed a sales range between $71 per square foot to $270 per square foot.

Store

$ Per Square Foot (2012)

Christown Spectrum

270

White Marsh Mall

220

Broward Mall

205

Meadows Mall

177

Mall St. Matthews

175

Augusta Mall

170

Northridge Mall

169

Santa Anita Mall

169

Rimrock Mall

164

The Mall at Tuttle Crossing

161

Valley West Mall

160

Carolina Place

157

The Avenues

151

West County Center

149

Victoria Mall

147

Lakeland Square Mall

146

Valencia Town Center

146

Coastland Center

144

Sunset Plaza

141

Dartmouth Mall

135

Tifton Plaza

135

Solomon Pond Mall

134

Pecanland Mall

123

Westfield Countryside

121

Valley Hills Mall

119

Crossroads Center

117

Kitsap Mall

114

Indiana Mall

102

Westfield Citrus Park

92

Sarasota Square

91

Anderson Mall

88

Country Club Mall

86

Southdale Center

73

Southridge Mall

71

Click to enlarge

The median in this sample was $145 per square foot, higher than average for J.C Penney, but nonetheless allows for a look at the relative difference in sales between stores. The 60th percentile store in this sample has sales $148 per square foot, while the 40th percentile store has sales of $135 per square foot. This 10% difference between a slightly above average store and a slightly below average store is already approximately the same as the difference between a poor quarter for J.C. Penney and a great quarter for J.C. Penney. The difference between the 75th percentile and the 25th percentile is much greater at 44%. Therefore the choice of store that one visits has a much greater influence on whether it appears busy or not than any actual change in J.C. Penney's sales levels.

Another comment that seems to come up occasionally is that the people saw J.C. Penney stores that were busier than Macy's stores. This is actually possible, but also does not indicate anything about J.C. Penney's sales levels with remote accuracy. Even with Macy's average sales per square foot outpacing J.C. Penney by about 72% in 2013, the wide variance in store sales means that some J.C. Penney stores will outperform some Macy's stores. The distribution in the above sample would suggest that the top 20% of J.C. Penney stores likely have higher sales per square foot than the bottom 20% of Macy's stores. However, there is no way that J.C. Penney's average sales per square foot will approach Macy's in Q1. Even with an absolute blowout quarter, the average J.C. Penney store will still have less than 2/3rds the sales per square foot of the average Macy's store.

Other Factors

Since the difference between a poor Q1 and a great Q1 is only 11%, long lineups outside of holiday periods like the Easter weekend may actually be indicative of tight staffing or understaffing, or random variance rather than strong sales. It should generally be fairly easy to handle a few extra transactions per hour in a store that is 100,000 square feet in size. Excessively long lineups would have to either be due to inadequate staffing, or random variations in traffic that cause transaction levels to increase far beyond the 11% difference between a poor quarter and a great quarter. Such spikes would be very temporary in nature and could cause an observer to get an inaccurate picture of J.C. Penney's sales levels. Conversely, that spike would likely be balanced out by abnormally low transaction volume at another time, causing an observer at that time to think that J.C. Penney stores were empty.

Conclusion

Store observations are useful for looking at various things such as pricing, promotional strategy, store layouts, merchandising, and customer demographics. However, store observation is not useful for determining whether sales or traffic have improved year-over-year. The difference between a bad quarter or a great quarter may be 11% or less. The difference caused by relative store strength could easily be four times as great, while the difference between weekday and weekend traffic could be over eight times as great as that 11% difference. The observation that a store is busy or empty is mostly a reflection on those factors of store strength and time of visit, with random variation and staffing levels playing a role too. To be able to determine with at least a smidgen of accuracy whether J.C. Penney is actually doing well via store observations would require many lengthy store visits, as well as proper information about last year's traffic, along with information about relative store strength and making proper adjustments for time of day and week at the very least.

Disclosure: I am short JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.