Several big department-store chains will report their first-quarter results later this week. Of that group, the stakes are highest for J.C. Penney (OTC:JCPN.Q), whose stock has been trading near multiyear lows recently, as the company's turnaround progress has slowed.
At least one of J.C. Penney's key rivals in the mid-price department-store segment wiped out last quarter. Sears Holdings (NASDAQ:SHLDQ) warned investors last month that its sales have plunged in the first few months of 2017. Did J.C. Penney manage to avoid a similar fate?
Retail faces serious headwinds
J.C. Penney posted strong sales growth in 2014 and 2015 as it recovered from some disastrous strategic mistakes made in 2012. However, this growth came to an abrupt halt last year, as J.C. Penney started to suffer from the broader trends impacting retailers. Its flat 2016 comp sales performance was actually fairly good compared with what other department store chains reported.
Sears Holdings has been at the other end of the spectrum lately. In 2016, it reported a 7.4% decline in comparable-store sales, as it continues to lose relevance with consumers.
Sears' woes seem to be multiplying. In late April, the company reported that its sales performance had deteriorated since the beginning of the first quarter, with comp sales down 11.9%. Sears blamed the downturn on "continued softness in store traffic and elevated price competition."
J.C. Penney certainly did better than that. However, the key question for investors is whether the downturn at Sears last quarter indicates that the overall retail environment worsened in Q1 or that Sears is losing even more market share to rivals such as J.C. Penney.
What management has said
Back in February, J.C. Penney projected that comp sales would be roughly flat this year, plus or minus 1 percentage point. While management claims that this forecast is conservative, CEO Marvin Ellison acknowledged on the Q4 earnings call that J.C. Penney's first-quarter results are likely to be near the lower end of the full-year guidance range.
On the plus side, J.C. Penney faces a relatively easy comparison, as sales declined modestly during the first quarter of 2016. It will also benefit from last year's rollout of appliance showrooms in more than 500 stores. But on the flip side, the company's 2017 growth initiatives haven't kicked in yet. In addition, J.C. Penney is still suffering from some recent product missteps.
More recently, J.C. Penney did offer investors one piece of good news. The company plans to close 138 stores this year, and sales improved at those locations after J.C. Penney published the list of store closures in March. As a result, the company decided last month to postpone these store closures from mid-June to late July.
It's not clear whether the recent sales lift was specific to the stores slated to close or if the whole chain saw an improvement in sales trends. But this is certainly a positive sign.
Other signs point toward a decent performance
On average, Wall Street analysts expect J.C. Penney to post an adjusted loss of $0.21 per share for Q1, up from a $0.32-per-share loss a year earlier, with revenue down about 1% year over year to $2.78 billion. These are probably achievable targets, notwithstanding the tough retail environment.
One encouraging sign is that J.C. Penney recently initiated a tender offer to buy back $300 million of its outstanding debt. The company's ability to pay down that much debt suggests that its free cash flow was much better than the Q1 2016 figure of negative-$421 million.
Of course, improved cash flow performance doesn't necessarily mean J.C. Penney hit analysts' sales and earnings estimates last quarter. However, investors can at least be fairly confident that J.C. Penney didn't have a complete meltdown to start 2017.