J.C. Penney Company, Inc. (NYSE:JCP) may be back in the retail game if yesterday’s earnings results are anything to go by. Analysts at Deutsche Bank seem to think so, as they’ve nearly doubled their price target for the department store chain, raising it form $6 to $10 per share. The company still posted losses for the first quarter, but those losses were far better than analysts anticipated.
However, the analysts maintained their Hold rating on J.C. Penney Company, Inc. (NYSE:JCP) due to concerns that even if there’s material improvement coming, they’re still expecting earnings declines and only $880 million in EBITDA by the 2016 fiscal year. That’s compared to $2.3 billion in the 2007 fiscal year. They believe the department store chain must take many more steps to “resent the cost structure and sustain top-line.”
J.C. Penney smashes SSS estimates
In a report dated May 15, 2014, analysts Paul Trussell and Matt Siler call J.C. Penney Company, Inc. (NYSE:JCP)’s earnings beat “very impressive.” The retail chain reported its best quarterly same store sales performance since the third quarter of 2006, as it rose 6.2%, compared to the Deutsche Bank estimate of 3.5% improvement .
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The company noted that traffic trends improved throughout the quarter. It also said this was the first time in 30 months that it had positive traffic in April. The Deutsche Bank team does point out that the first quarter had a very easy comparison for same store sales because it showed J.C. Penney Company, Inc. (NYSE:JCP) “at a time when it was the farthest removed from the revamped strategy behind the current turnaround.” As a result, year over year comparisons will become progressively difficult throughout this year.
J.C. Penney improves margins as well
J.C. Penney Company, Inc. (NYSE:JCP) also reported a major gross profit margin improvement, as it increased by 225 basis points year over year, climbing to 33.1%. The retail giant still has room to improve, however, as it remains below the 41.5% margin recorded in the first quarter of 2010. The chain even managed that improvement with large amounts of clearance merchandise in February. It did bring private label merchandise up to 50% of its merchandise.
J.C. Penney Company, Inc. (NYSE:JCP) also improved selling, general and administrative expenses margin by 489 basis points. That means the retailer has removed $70 million in costs over the last year.
Looking into J.C. Penney’s future
The Deutsche Bank team has made adjustments in forecasts, moving its same store sales estimate for the current quarter up from 5% to 6%. They’re estimating gross margins of 35% and about 300 basis points of selling, general and administrative leverage. For the full year, they estimate a 5.6% increase in same store sales, compared to their previous estimate of 4.5%. They’re also expecting gross profit margins of 34.2%, an increase of 480 basis points year over year, and total selling, general and administrative margins of 37.8%. The result is EBITDA of $203 million. They expect J.C. Penney Company, Inc. (NYSE:JCP) to end the current fiscal year with $1.5 billion in cash on its balance sheet.
For next year, they maintained their same store sales increase of 3.5%, although they raised their gross profit margin estimate to 36.5%. They maintained their 2% increase in selling, general and administrative margin, which would result in $582 million in EBITDA.