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Can JCPenney Improve Its Bottom Line?

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Jul. 1 2016, Updated 11:07 a.m. ET

Improvement in bottom line

JCPenney’s (JCP) turnaround efforts helped it trim its losses in fiscal 2015, which ended January 30, 2016. In fiscal 2015, the company reported an adjusted loss per share of $1.03 compared to an adjusted loss per share of $2.67 in the previous year.

Despite lower sales, JCPenney was able to bring down its 1Q16 adjusted loss per share to $0.32 compared to an adjusted loss per share of $0.57 in 1Q15. This improvement was driven by the company’s operational efficiencies. As we mentioned in Part 1 of this series, JCPenney is optimistic about generating positive adjusted EPS (earnings per share) and EBITDA[1. Earnings before interest, tax, depreciation, and amortization] of $1 billion in fiscal 2016.

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Expectations from 2Q16

As you can see in the above graph, JCPenney reported better-than-expected adjusted earnings per share in all the quarters of fiscal 2015 as well as 1Q16. For 2Q16, analysts expect JCPenney’s adjusted earnings per share to come in at -$0.14 compared to -$0.41 in 2Q15. This consensus analysts’ estimate is based on a 2Q16 sales growth expectation of 1.4%.

Currently, analysts expect the adjusted EPS for Macy’s (M), Nordstrom (JWN), and Kohl’s (KSS) to fall 21.8%, 39.8%, and 3.7%, respectively, in 2Q16.

JCPenney, along Macy’s, Nordstrom, and Kohl’s, constitutes 0.9% of the iShares U.S. Consumer Services ETF (IYC).

Efforts to improve the bottom line

JCPenney is focusing on improving its profitability by bringing down expenses and increasing private brand penetration. JCPenney’s private brands carry higher margins compared to national brands. The company also aims to bring down its debt levels and reduce interest expenses. In the 4Q15 conference call, Edward J. Record, JCPenney’s chief financial officer and executive vice president, stated that the company expects to reduce its net debt to EBITDA ratio from 5.4 times to less than three times by 2017.

On June 23, 2016, JCPenney completed the refinancing of its $2.3 billion five-year senior secured term loan credit facility, which it began in 2013. The amended and restated term loan facility has a lower interest rate than the 2013 facility and an extended maturity from 2018 to 2023. With the completion of the refinancing, the company expects to generate $24 million in annualized interest expense savings. In 2Q16, JCPenney will record a one-time $34 million non-cash charge to write-off the unamortized debt issuance costs associated with the 2013 facility.

In the final part of this series, we’ll discuss analysts’ recommendations for JC Penney’s stock.

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