ANALYSIS: Second-half the "real test" for JC Penney
JC Penney has been working to turn around its business for some time
The second half of fiscal 2014 will be the real test for JC Penney, analysts believe, despite the US department store retailer hailing its first quarterly rise in total sales since May 2011. just-style takes a look.
Last week, the company, which has been working to turn around its business for some time, saw its net losses widen to US$352m in its first-quarter, from a loss of $348m last year.
Net sales, however, grew 6.1% to $2.80bn against $2.64bn in the prior year. This is the retailer's first quarterly total sales rise since May 2011, when sales edged up 0.4% to $3.94bn. Same store sales for the quarter increased 6.2%.
Barclays analysts Hale Holden and Jamie Robins said the results were ahead of their own, and consensus, estimates with growth appearing to be nearly entirely driven by a strong rebound in late March and April.
"While we had expected a ‘Bull Light' quarter, JC Penney posted a positive quarter with comp growth well ahead of estimates and better than peers while (mostly) affirming full-year targets," they noted.
This was a view shared by UBS Investment Bank analyst Michael Binetti.
"In our view, better than expected same store sales, as well as JC Penney's improved 2014 outlook (breakeven FCF and increased liquidity) decreases the near-term risk of a further capital raise ahead of peak cash use periods (3Q holiday inventory build). Additionally, JCP's renegotiated ABL credit facility (to $2.35bn from $1.85bn) further enhances its liquidity near-term and minimises risk of a dilutive equity transaction in 2014."
The company's turnaround is taking place in three stages. The first, the stabilisation phase, was initiated in April last year. This was followed by a period of rebuilding in the third and fourth quarters of fiscal 2013. The retailer is now in its third and final stage, which it calls "the go-forward phase", during which it says involves positioning JC Penney for long-term profitable growth.
On the firm's earnings call last week, CEO Mike Ullman told analysts he is pleased the company is making "excellent progress" on its final phase.
"I believe [our] results demonstrate the case. During this phase we're focused on refining our merchandising and marketing strategies and are to steadily grow sales and significantly improve gross margins while continuing to tighten and manage our expenses, all with an eye toward returning to profitable growth."
Binetti, however, said that while first-quarter gross profit dollar growth trends are "heartening", he believes the next stock test will be whether JC Penney can continue to show significant/profitable same store sales increases in the second half. This, he says, as the benefit of lapping one-time business disruptions in fiscal 2013, such as home department construction, diminish.
"As these tailwinds abate and same store sales compares begin to normalise (SSS comps are -14% in 1H, and -1% in 2H), we believe investors will increasingly scrutinise current valuation (which we believe already assigns a premium to JCP's long-term EBITDA potential) if it becomes clear that JCP can't meaningfully outpace broader dept store industry SSS averages over several years."
Holden and Robins point to a potentially heavily promotional environment in the second half, which could have an impact.
"JCP had been highly promotional in the quarter with large Mother's Day, Easter, and President's Day sales. We are moderately concerned that competitors will follow, resulting in simply a higher overall promotional environment."
For the full year, the retailer has forecast for second-quarter and full-year comparable store sales to increase by mid-single digits, and gross margin to improve significantly year-over-year.
Ullman concluded on the call: "During the balance of the year we will be executing a plan that's designed to improve gross margins and steadily grow sales. We will continue to tightly manage and ultimately leverage our expenses. With this strategy we see a path back to generating positive free cash flow this year."
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