How Bad Will J.C. Penney's Earnings Be?

J.C. Penney is set to report quarterly earnings on Feb. 26, and the previously announced 2% increase in same-store sales, following a 30%-plus decrease in the previous year, doesn't bode well for the company. More store closings are likely, following in the footsteps of Sears and RadioShack, making a J.C. Penney turnaround looking like a long shot at best.

Feb 22, 2014 at 10:15AM

Jcp Store

Source: Sam Howzit on Flickr

Troubled retailer J.C. Penney (NYSE:JCP) is set to report its fourth-quarter earnings on Feb. 26, and all signs are pointing to a miserable holiday quarter. In January, the company released a vague press release stating that it was "pleased" with its holiday performance, and then in February the company finally released some actual data. While same-store sales rose year over year, the 2% increase during the quarter was almost meaningless relative to the massive decline during the fourth quarter of 2012.

Although the return to same-store sales growth may seem encouraging, J.C. Penney is in very serious trouble. It joins companies like Sears Holdings (NASDAQ:SHLD) and RadioShack (NYSE:RSHCQ) on the list of retailers quickly becoming irrelevant to consumers.

What analysts are expecting
Analyst estimates for J.C. Penney aren't very meaningful here, and the spreads on both the revenue and the earnings estimates are extremely wide. Given the data that we already have, revenue will likely be within a few percentage points compared to the same quarter last year, with the average analyst estimate of $3.86 billion slightly below the $3.88 billion from the fourth quarter of 2012.

Earnings-per-share estimates are all over the map, ranging from $-1.10 to $-0.50; although anywhere in this range would be better than the $1.95 per-share loss during the fourth quarter of 2012. Given the highly promotional nature of the 2013 holiday season, J.C. Penney likely had to resort to heavy discounts in order to grow same-store sales, and this could lead earnings to fall well short of analyst estimates.

What really matters
While same-store sales growth is certainly a step in the right direction, J.C. Penney needed to grow sales at a far higher rate than 2% in order to have any chance of making a comeback. Holiday sales were barely better than the dismal results from 2012, and J.C. Penney's progress on that front has been token at best.

Beyond same-store sales results, which we already know, investors should take a close look at J.C. Penney's financial health. An update on J.C. Penney's balance sheet will paint a much clearer picture of how much time the company has left to turn things around. The company touted that its available liquidity was greater than $2 billion at the end of the fourth quarter. But with about $5.5 billion in debt, interest payments along with operating losses will eat into that total rather quickly. J.C. Penney's trailing-12 month operating cash flow, through the third quarter, is roughly $-1.5 billion, and with same-store sales only increasing slightly during the holiday quarter, the rate of cash burn has shown no signs of slowing.

J.C. Penney will need to raise more cash, maybe even this year. And with debt levels already elevated, the company's financial position is getting more precarious every day.

Expect store closings
Some of J.C. Penney's debt is tied to its real estate, so the company's options in terms of shutting down stores are somewhat limited. But it's clear that, given the company's failure to meaningfully boost sales, store closings are likely inevitable. Other troubled retailers have already been forced to pursue this option, and J.C. Penney looks like it will have no other choice.

Sears had a particularly rough holiday season, with domestic same-store sales down 9.2% in its namesake stores. The company is bleeding money, much like J.C. Penney, and asset sales are the only thing keeping the company afloat. Sears is planning to close down its flagship store in Chicago later this year, for example, and the company recently announced that it would spin off its Lands' End clothing business. Dismantling the company in an effort to save it is a desperate move, but it's the only option left for the struggling retailer, and J.C. Penney is in a similar position.

Sears Store

Source: Nicholas Eckhart on Flickr

Another retailer forced to recently shutter stores is RadioShack. The struggling small-format consumer-electronics retailer recently announced that it would close 500 of a total of 4,500 stores over the next few months while simultaneously overhauling the remaining stores in an effort to win back consumers. RadioShack's Superbowl ad, where 80's icons cleared out a RadioShack store, proved to be a big hit. But much like Sears and J.C. Penney, it's unclear whether RadioShack can ever regain relevance in the eyes of consumers.

J.C. Penney has shut down some stores, with 33 store closures announced last month, but this is not nearly enough. J.C. Penney will need to significantly downsize in order to have any chance at surviving.

The bottom line
J.C. Penney is unlikely to survive without a significant downsizing, and the earnings results should make that abundantly clear. Even if the company does follow in the footsteps of other troubled retailers, it may prove to be too little too late, with liquidity rapidly drying up. The 2013 holiday season was make or break for J.C. Penney, and with same-store sales rising only minimally, I expect continued losses on the horizon.

While J.C. Penney, Sears, and RadioShack are in a death spiral, there are other retailers worth investing in. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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