J C Penney Company Inc (NYSE:JCP) is scheduled to report its second quarter earnings on Thursday, August 14th. Equity research firm Sterne Agee published a report previewing JCP’s 2Q earnings on Monday,  August 11th.

J.C. Penney Company JCP

SA analysts Charles Grom et al. sum up their take on J C Penney in the introduction to their report. “we see SSS rising ~5.0% with GPM increasing over 500 bps YOY. Looking ahead, we expect the company to reiterate its full-year guidance, but we still maintain our view that its expectations for break-even FCF look too optimistic. All told, with so many cross currents, the stock is a “jump ball” from here; accordingly, we stay sidelined.” (Sterne Agee currently rates J C Penney Company Inc (NYSE:JCP) as Neutral.)

J C Penney Financials

J C Penney second quarter estimate details

Grom et al project an EPS of -$1.00 compared the consensus analyst estimate of a loss of -$0.92. The SA analysts say they expect comps to be 5.0%, notably less than consensus expectations for 6.0%, and compared to “mid single digits” guidance. The analysts explain their JCP earnings model. “While still cycling double-digit declines, our comp estimate reflects our belief that the business is starting to stabilize given the return to basics advocated by CEO Mike Ullman (underscored by a focus on relevant merchandising and promotions/advertising).”

However, the report also notes that even if J C Penney Company Inc (NYSE:JCP) can hit the mark on comps, the analysts “suspect the 2Q spotlight will be on gross profit margin given lofty targets implied by guidance.” They model a 540 bps increase in GPM related to a major decline in clearance activity and much higher private label mix at ~50% compared to ~30% year over year.

The SA analysts do believe that Ullman has a firm grip on total SG&A expenses, and will likely post another record low at $1.16 billion. They estimate an EBIT loss of $218 million and a net income loss of $315 million for J C Penney Company Inc (NYSE:JCP) for the quarter.

Cash burn a concern

The Sterne Agee report estimates that JCP will have burned through $433.0 million in the second quarter. Their models suggest a net loss of $315 million  and an EBITDA loss of $63.0 million, D&A of $155.0 million,  a working capital boost of $213.0 million, and cap-ex of $60.0 million. This would leave J C Penney Company Inc (NYSE:JCP) with just over $737 million cash on hand at the end of 2Q.