J.C. Penney Posted Strong Earnings But Fell On Potential Risks

Aug.16.14 | About: J.C. Penney (JCP)


After having a great day on Aug. 14, with a 4% rise by the close of the market, the shares of J.C. Penney shot up further over 10% in after-hours trading.

Revenue rose year-over-year and beat out forecasts, while earnings per share handily outperformed what investors had expected as clearance items and its store-within-a-store setups posted strong results.

Moving forward, J.C. Penney appears to offer investors attractive prospects, but high debt and continuous net losses could still prove problematic, perhaps explaining its 3% drop on Aug. 15.

Even after rising 4% for the day, shares of J.C. Penney Company (NYSE:JCP) shot up over 10% after the market closed on Aug. 14 in response to better-than-expected revenue and earnings before declining around 3% on Aug. 15. While troubles at the once high-flying retailer still remain, the company appears to have successfully dragged itself back from the brink of bankruptcy and management believes that the future will continue to grow brighter for this American icon.

Revenue and Earnings handily outperformed

For the quarter, J.C. Penney reported revenue of $2.80 billion. In addition to coming in 5% above the $2.66 billion management reported the same quarter a year earlier, the company's top line slightly beat analyst estimates of $2.78 billion. According to the company's press release, this rise in sales was driven by a 6% increase in comparable store sales, far outpacing the 11.5% decline in comparable store sales seen in the same quarter last year. These metrics were aided by the success of its store-within-a-store setups like Sephora.

Earnings Overview
Last Year's Forecasted Actual
Revenue (billions) $2.66 $2.78 $2.80
Earnings per Share -$2.20 -$0.94 -$0.56
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While this outperformance isn't significant in and of itself, the company also succeeded in surpassing forecasts on the bottom line. For the quarter, J.C. Penney reported a loss per share of $0.56. Although this may appear bad, it represents a vast improvement over the $2.20 loss reported a year earlier and was almost half the $0.94 loss Mr. Market anticipated.

In addition to higher sales, the business benefited from lower costs, primarily in its cost of goods sold and its selling, general and administrative expenses. Year-over-year, J.C. Penney's cost of goods sold dropped from 70.4% of sales to 64%, while its selling, general and administrative expenses declined from 38.5% of sales to 34.4%. Both of these were positively impacted by the company's clearance sales, ridding itself of old inventory so that it can generate cash.

Margin Improvement
Q2 2014 Q2 2013
Cost of Goods Sold % of Sales 64.0% 70.4%
SG&A % of Sales 34.4% 38.5%
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Looking forward, management has high expectations for the retailer. For the third quarter, as well as the rest of the company's 2014 fiscal year, comparable store sales should climb in the mid-to-high single digits. This, combined with a gross margin that is "expected to improve significantly" compared to 2013 and the belief that positive free cash flow is in sight suggests that J.C. Penney's situation is turning around at a nice clip.


Over the past few years, times have been hard for J.C. Penney, especially after CEO Ron Johnson came into the picture before later being ousted. Against all odds under the leadership of Mike Ullman, the retailer has turned itself around and results moving forward will likely be pleasing to investors. That being said, there are still problems that remain that investors should consider before deciding whether or not to buy. With $5.3 billion of long-term debt and with management still reporting net losses, the company still has a lot of work to do before it can catch up to rivals Macy's (NYSE:M) or Dillard's (NYSE:DDS), but this performance is a good start.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in JCP over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.