J C Penney Company Inc Plunges Post-Earnings

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J C Penney released its first quarter earnings report last night, and Wall Street is certainly not pleased despite the beat on several key metrics. While analysts generally note several positives in the department store chain’s report, they remain bearish on the stock.

J C Penney beats on losses

Last night J C Penney posted an adjusted loss of 57 cents per share, beating consensus estimates. Sales increased 2% year over year to $2.86 billion, which was roughly in line with expectations. Comparable store sales increased 3.4%, and Nomura analyst Robert Drbul and his team noted that the two-year stack comparable sales were up “an impressive 10.8%.

They believe the company’s sales were slower than expected toward the end of last month but that they probably picked up again this month. Evercore ISI analysts Matt McGinley and Josh Schwartz pointed out that J C Penney wasn’t the only retailer to struggle with slow sales at the end of April and agreed with the Nomura team that sales trends for this month look better.

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Concerns about J C Penney

More than one firm noted that J C Penney management may be getting ahead of themselves in their guidance. For example, Sterne Agee CRT analyst Charles Grom and his team said they don’t think it was wise for them to up guidance only about 100 days into the fiscal year. They also continue to doubt whether the retailer’s long-term goals are viable.  The Nomura team thinks J C Penney may not be able to hit its target of $1.2 billion in EBITDA for the 2017 fiscal year.

The Evercore ISI team remains focused on J C Penney’s inventory levels and capital expenditures. They will also be keeping an eye on the retail chain’s future investments, as management has indicated plans to continue investing in the company’s website and e-commerce.

They’re also going to watch to see what J C Penney does with its debt. They suggest that the company could refinance some of it because it is in a better position to be able to do that. The current interest rate on that debt is a staggering 7%. They also suggest that the company could remove some of its stores from the collateral on the loan. They remain more concerned about “the trajectory and level” at which they think J C Penney can recover.

Good outweighs the bad?

Despite the bearish response from Wall Street, some analysts found more good than bad in J C Penney’s earnings report. For example, one good thing analysts from several firms pointed out was the renewed strength in sales of private brands.  This is an especially important part of the department store chain’s recovery because the private brands former CEO Ron Johnson removed from the company’s stores were its bread and butter. The numbers showed that it was a huge mistake to get rid of those private brands, which interim CEO Myron Ullman brought back.

The Nomura team also thinks the retail chain is successfully executing its plan to return to profitable growth. The Evercore ISI team was happy to see the continued improvements in both margins and comparable store sales. Also the beats on losses, continue improvements in selling, general and administrative expenses and better control of inventory combined to drive better-than-expected metrics overall.

J C Penney’s valuation remains high

In spite of all the good things in J C Penney’s earnings report, most analysts remain concerned about the company’s valuation in light of the fact that this is still a turnaround story. The Evercore ISI team remains Sell-rated with a $7 per share price target on the retailer because they say an acceleration in the company’s recovery pace is needed to support the current valuation. They think the trajectory in improvement is just too low at this time.

The Sterne Agee CRT team remains Neutral-rated on the company, while the Nomura team maintained its Reduce rating and $8 per share price target, also because of the valuation. Shares of J C Penney slumped by as much as 5.17% to $8.26 per share during regular trading hours today before starting to recover. The stock was down 2.64% at $8.48 per share as of this writing.

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