JCPenney Stock Soars on Lower-than-Expected Q3 Loss

Mid-tier department store chain JCPenney (JCP) impressed investors by reporting a lower-than-anticipated loss for the third quarter of fiscal 2019. However, the company’s revenue remained weak. JCPenney stock was up 7.9% as of 2:40 PM ET today.

The company’s third-quarter revenue of $2.50 billion fell below analysts’ estimate of $2.51 billion. Its revenue (comprising its net sales and credit income) fell 8.5% year-over-year, and its net sales fell 10.1% to $2.38 billion. Its same-store sales fell 9.3% compared to analysts’ estimate of 8.3%. JCPenney and other retailers are succumbing to fierce competition from online retailers such as Amazon (AMZN). Also, company-specific issues such as strategic missteps and abrupt management exits last year have affected its performance.

The company’s exit from the major appliance and in-store furniture businesses had a 270-basis-point negative impact on its third-quarter same-store sales. Merchandise categories that delivered good results in the quarter included fine jewelry, footwear, and men’s and women’s apparel. Within apparel, denim performed well.

JCPenney’s lower-than-expected loss

Excluding one-time items, JCPenney’s adjusted loss per share narrowed to $0.30 in the third quarter of fiscal 2019 compared to $0.52 in the third quarter of fiscal 2018. Analysts expected an adjusted loss per share of $0.55. An improved gross margin and lower advertising and store controllable expenses helped bring down its losses.

JCP’s gross margin expanded 350 basis points on a reported basis to 35.4%. Higher store and online margins, an improved shrink rate, and its exit from the major appliance and in-store furniture categories drove the company’s gross margin expansion. Under the leadership of CEO Jill Soltau, JCPenney exited the major appliance and in-store furniture categories, which carried lower margins. The company is focusing on higher-margin categories such as women’s apparel. Its operating margin was -1.4% in the third quarter of fiscal 2019 compared to -3.8% in the third quarter of fiscal 2018.

Updated earnings outlook

JCPenney now expects its adjusted EBITDA to exceed $475 million in fiscal 2019. It had earlier predicted adjusted EBITDA in the range of $440 million–$475 million. The company continues to expect its fiscal 2019 same-store sales to fall in the range of 7%–8%. It expects its fiscal 2019 gross margin to improve 150–200 basis points.

Expectations from peers

Department store chains Macy’s (M), Kohl’s (KSS), and Nordstrom (JWN) will announce their third-quarter results next week. Analysts expect Macy’s third-quarter sales to fall 1.5% to $5.32 billion and its adjusted EPS to break even. Analysts forecast a 2.1% fall in Nordstrom’s revenue to $3.67 billion. Meanwhile, Nordstrom’s third-quarter adjusted EPS could fall 4.5% to $0.64. Analysts anticipate a 0.7% rise in Kohl’s sales to $4.40 billion and a 12.2% fall in its adjusted EPS to $0.86.

Department stores are investing significantly in their omni-channel capabilities to attract customers. They’re also closing unprofitable stores and enhancing their merchandise assortments. As part of its turnaround strategy, JCPenney partnered with thredUP to offer a selection of secondhand women’s clothing and handbags in 30 stores. This month the company opened a brand-defining store in Hurst, Texas. This store includes various customer attractions, including the All-You zone offering fashion jewelry and accessories, Sephora stores, the Salon & Spa by InStyle, a kids’ destination with a clubhouse, and a barbershop called The Barbery.

On November 14, JCPenney stock was up 5.8% year-to-date. In comparison, the stocks of Macy’s, Nordstrom, and Kohl’s were down 45.5%, 18.9%, and 13.2%, respectively. Overall, department store stocks have underperformed the S&P 500 Index, which has risen 23.5% this year.