J.C. Penney: Ready To Release Holiday Update

| About: J.C. Penney (JCP)
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Summary

Macy's and Kohl's reported -2.1% comps for November/December and lowered EPS guidance for the year.

J.C. Penney has typically performed a few percentage points higher than those two companies during 2016, and is benefiting from appliance sales now.

I think J.C. Penney can likely do around +1.5% to +4.5% in November/December, generally in-line with its prior guidance.

Headquarters sale/leaseback is roughly in-line with previous expectations and should have a positive effect on cash flow.

Department store retail remains challenging, but I expect J.C. Penney to continue its progress with deleveraging.

J.C. Penney (NYSE:JCP) should be releasing a holiday sales update soon, as last year it released its holiday update in the morning of the first Thursday in January. J.C. Penney fell significantly afterhours on Wednesday after Macy's (NYSE:M) and Kohl's (NYSE:KSS) announced holiday updates that included downward revisions in guidance. The updates indicate the continuing challenges with department store retail, although I am still cautiously optimistic that J.C. Penney can meet its Q4 guidance.

Macy's And Kohl's Sales

Macy's and Kohl's both released holiday updates indicating -2.1% comparable store sales for November/December 2016. Macy's had indicated guidance for -0.5% to -2.0% comparable store sales in Q4 2016. Kohl's didn't previously mention expectations for Q4 2016, but indicated that sales were lower than planned. The two companies also reduced their full year EPS guidance by around $0.20 to $0.30 due to a combination of sluggish sales and lower than expected gross margins.

The sales miss for the two companies didn't appear that bad, but I think expectations for the holiday season were raised by the general optimism during the Q3 2016 conference calls. As well, the downward revision to EPS guidance was somewhat more significant.

Effect On J.C. Penney

J.C. Penney's stock fell afterhours since the sales performance of various department stores are usually at least somewhat correlated. Department stores have been facing continuing challenges from predominately online retailers as well as discount retailers and fast fashion chains. Thus, weak results from multiple department stores may mean that the department store sector as a whole is continuing to lose market share to other types of stores, rather than trading share within department store retailers.

J.C. Penney has outperformed Kohl's and Macy's by around 1.4% to 4.1% during the first three quarters of 2016. As well, appliance sales may add another 2% to 3% in sales now that they have been fully rolled out to 500 stores.

Q1 2016

Q2 2016

Q3 2016

J.C. Penney Vs. Kohl's/Macy's

+3.85%

+4.1%

+1.4%

Based on Macy's and Kohl's performance, I'd therefore expect J.C. Penney's comparable store sales to come in at around +1.5% to +4.5% for the November/December period. This would be generally in-line with its guidance for +2% to +5% comparable store sales in Q4 2016.

Gross margins are an uncertainty given the weaker than expected gross margins at Kohl's and Macy's. However, I'm not sure whether J.C. Penney will mention that item. It is more likely to mention whether it is on track to meet its EBITDA target for the year, and I'd expect J.C. Penney to be able to reach that target still.

Headquarters Sale

J.C. Penney also reported the sale of its headquarters and associated land for gross proceeds of $353 million. The sale price of $353 million was slightly lower than my initial $380 million estimate, and around the $360 million number that real estate sources mentioned before. However, J.C. Penney appears to be receiving significantly more than the $200 million to $250 million that was mentioned in a Fitch Ratings note before.

J.C. Penney is leasing around 1.2 million square feet of the 1.8 million square feet building space, so I am estimating that its SG&A costs will go up around $10 million to $15 million per year as a result of the sale/leaseback. J.C. Penney's rental costs should be partially offset by its savings on property taxes and maintenance costs for the whole headquarters.

While J.C. Penney gives up a valuable asset with the sale, it can use this money to pay off debt and improve its overall cash flow as a result.

Conclusion

J.C. Penney reportedly had a strong start to the holiday season, but the news from Macy's and Kohl's indicates that department store sales trends may have been up and down for the quarter. However, I still think that J.C. Penney has a solid chance of meeting its guidance, both in terms of sales and EBITDA. The challenges with department store retail should not be underestimated, but J.C. Penney should be able to make continued progress in deleveraging.

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Disclosure: I am/we are long 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.