J.C. Penney Preannounces Solid 3Q Results

Updated on

J.C. Penney shares rallied this morning after the retailer preannounced some quarterly numbers that were better than expected. The company released the numbers in conjunction with the news about a settlement in the false advertising case that had been filed against it.

Shares of J.C. Penney rose by as much as 3.17% to $8.79 per share in early trading this morning.

J.C. Penney beats in comparable sales, gross margin

The department store chain reported a 6.4% increase in third quarter comparable store sales, which just edged out the consensus estimate of a 6% increase. Gross margin was 36.6%, which was ahead of management’s guidance but slightly below the consensus of 36.9%. Earnings were also ahead of management’s outlook.

Goldman Sachs analysts Stephen Grambling, Christopher Prykull and Alison Levens said although the preannounced results beat management’s expectations, Wall Street had already baked in a slight beat because of management’s positive commentary throughout the quarter. CEO Marvin Ellison had said at Goldman Sachs’ Global Retail Conference in September that comparable store sales were tracking ahead of their expectations.

J.C. Penney targeting strong comparables in 2H

Management guided for a full year goal of a 4% to 5% increase in comparable store sales. This implies a 5% to 6% increase in the second half because of the 3.8% average increase in the first half of the year, notes the Goldman Sachs team.

J.C. Penney had guided for comparable store sales to accelerate between the second and third quarters. For the fourth quarter, however, the retail chain faces a more difficult comparison of 440 basis points. The Goldman Sachs team had already been expecting that the third quarter would run at the high end of the expected range.

Questions for J.C. Penney’s call

J.C. Penney management is set to update investors and analysts on their progress on a conference call on Friday. The Goldman Sachs team noted that the retailer’s strong comparable store sales in October and November 2014 ran counter to competitors’ comparable sales number. On Friday, they want to learn how J.C. Penney is doing this year against those strong comparisons.

Sterne Agee CRT analysts Charles Grom, Renato Basanta and John Parke suggest that J.C. Penney’s August and September sales were “very strong” and that October sales were softer because temperatures were unseasonably warmer than usual with the warmest temperatures in 25 years. They have a Buy rating and $13 per share price target on the retailer.

J.C. Penney at the product level

Additionally, Grambling and team want to see whether the department store chain is starting to see some product categories emerge as weaker than others. For example, they’re wondering whether kids, some parts of the Home department, and luggage sales will recover. Further, they want to find out how much of the growth in comparable store sales was driven by Sephora and what the exit of Mango means for the retailer.

And finally, they want to know whether the merchandise margin will keep improving and what markdown trends look like going into the holiday shopping season. The Goldman Sachs team said their price target and estimates are under review and might change after Friday’s conference call. Currently they have a Sell rating on J.C. Penney.

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