Northcoast Research Managing Director Jeff Stein maintains a Neutral rating for J.C. Penney Company, Inc. (NYSE:JCP) as he examines recent numbers from the retailer and comes away with a very mixed view.

J.C. Penney

J.C. Penney Company, Inc. (NYSE:JCP) hit our operating loss forecast for Q4, posting a $78 million operating income loss, however, they needed cost cuts to get there with GM% only improving 460 bps from last year. Non-GAAP per share EPS excluding non-recurring items, a tax benefit of $270 million primarily related to gains from annual re-measurement of the pension plan but including pension expense was a loss of $0.57 against our estimated loss of $0.54.

J.C. Penney’s comp store sales

Comp store sales grew 2.0% in the quarter and declined 7.4% for the year. In the quarter, the company called out home, men’s apparel, women’s accessories and Sephora as the top performing merchandise categories. Traffic was down about 6% with all of the improvement driven by ticket and conversion.

J.C. Penney Company, Inc. (NYSE:JCP)’s GM% was up 460 bps from last year but fell far short of our forecast of 33.0% even after adjusting for the 190 bps hit the company took for markdowns on merchandise that will not be carried on a go-forward basis.

Positive free cash flow

The big surprise was management guiding to positive free cash flow for the year. In our model we cannot get there and have estimated negative $258 million of FCF. We suspect that there are some non-cash items we cannot predict that would narrow the gap considerably. To help get them there, JCP has further reduced its planned capital spending by $50 million to $250 million in FY15. Management does not contemplate any asset sales in its guidance.

In our view, the ramp in comps and GM% is too slow to reach profitability any time soon without another equity infusion or significant round of cost-cutting.

Conclusion

Liquidity does not appear to be an issue for the immediate future. J.C. Penney Company, Inc. (NYSE:JCP) finished the year with over $2.0 billion in liquidity and estimates that it will finish FY15 at a similar level. However, we still see a company that is highly leveraged and limping along in a difficult environment for mid-tier retailers. Despite the low price of the shares, we continue to believe that the recovery is highly speculative and advise investors to remain on the sidelines. The rating remains Neutral.