On Friday morning, J.C. Penney (JCP) will report Q3 earnings, covering the three months ending in October. I have maintained a bearish stance on J.C. Penney for over a year, and recent events have not given me any reason to believe things will improve soon. Analysts are currently projecting a loss of 4 cents per share in Q3, with revenue declining by nearly 18% year over year to $3.28 billion. For next quarter, the consensus is for a profit of 98 cents per share on revenue of $4.76 billion, down a little more than 12% year over year.
I expect J.C. Penney to miss on both revenue and profit for Q3. I expect the quarterly loss to be around 20-30 cents per share, excluding any one-time items, on revenue of approximately $3.15 billion (that represents a roughly 21% decline year over year). As for the forecast, while J.C. Penney has stopped providing quantitative guidance, I expect relatively downbeat commentary regarding Q4.
This is supported by the relatively dour Q4 forecast offered on Wednesday morning by competitor Macy's (M). Not only has Hurricane Sandy disrupted shopping trends on the East Coast, but the mixed result from this week's election has brought the looming "fiscal cliff" back into sharp focus. While tax hikes and spending cuts will not go into effect until next year, the political debate this fall is likely to be contentious and will attract growing media attention. This will create a climate of nervousness in the U.S. that may crimp holiday spending. With three more department store chains reporting on Thursday (Kohl's, (KSS), Dillard's (DDS), and Nordstrom (JWN)), it will be interesting to see how other management teams are thinking about the 2012 holiday season.
Analysts seem to think that the rollout of ten new "shops" within J.C. Penney (five in August and five more in September) will have a quick, positive impact on overall sales and profit trends. It is clear that the shops are performing better than the rest of the store, but this will not be sufficient to drive the expected improvement in results. Sales were down 22.6% in Q2, meaning that analysts are expecting sequential improvements of roughly 500 basis points in both Q3 and Q4.
This does not square at all with management's commentary over the past two months. In September, CEO Ron Johnson highlighted CFO Ken Hannah's forecast that the second half of the year would be very similar to the first half (i.e. comps down around 20%). Moreover, at the same time Johnson noted that while company performance had been good in August, the two weeks following Labor Day had been much tougher than planned. Johnson explained that even if J.C. Penney could achieve very strong +20% comps in the 10 new shops, these shops only make up 10% of the store and so the overall effect on J.C. Penney's sales would be minimal (roughly +2%).
Another reason that I am skeptical of about J.C. Penney's Q3 sales results is the recent reappearance of promotional behavior. Ron Johnson's strategy is predicated on eliminating coupons, yet J.C. Penney sent customers a thinly-veiled coupon ($10 towards any purchase of $10 or more) last month. This was quickly followed by a promotion for 30% off most clearance merchandise. As I have discussed before, these two promotions are a bad omen for J.C. Penney sales. While it is admirable that Johnson is adjusting his strategy in light of performance, the return to promotional behavior represents clear evidence that traffic has been weak and the company has continued to have trouble clearing merchandise.
Given that J.C. Penney was ordering based on the assumption that sales would be down by around 20%, it is particularly disturbing that the company needed to return to promotions to drive sales. This is why I would be surprised if sales were down by anything less than 20% in Q3. With J.C. Penney continuing to bleed cash and the turnaround still far off, I continue to rate the company as a sell/short. My price target remains $18.
Disclosure: I am short JCP.