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Why J.C. Penney Stock Is Crashing Today

By Timothy Green – Oct 27, 2017 at 2:13PM

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The department store no longer expects to be very profitable this year.

What happened

Shares of department store chain J.C. Penney (JCPN.Q) tumbled on Friday after the company provided preliminary third-quarter results and dramatically cut its full-year earnings forecast. Shares of competitor Kohl's (KSS -1.75%) were also hit on the news. As of 12:45 p.m. EDT, J.C. Penney stock was down about 17.5%, while Kohl's stock was down about 5%.

So what

J.C. Penney expects comparable-store sales to grow by 0.6% to 0.8% during the third quarter, thanks to growing appliance sales and e-commerce growth. Unfortunately for investors, the good news ends there. J.C. Penney expects to produce an adjusted loss between $0.40 and $0.45 per share, driven by the liquidation of slow-moving inventory in the women's department. Analysts were expecting a loss of just $0.18 per share.

The outside of a J.C. Penney store.

Image source: J.C. Penney.

This depressed third-quarter guidance will flow through to J.C. Penney's full-year results. The company expects comparable-store sales to be flat at best and decline 1% at worst, along with adjusted earnings between $0.02 and $0.08 per share. Previous guidance called for adjusted earnings between $0.40 and $0.45 per share, and that guidance included the impact of asset sales earlier in the year.

J.C. Penney CEO Marvin Ellison discussed the necessity of these painful inventory liquidations: "Following this comprehensive reset, we saw an improvement in performance, particularly in our women's division, confirming these actions were necessary to drive growth in our women's apparel business."

Kohl's is facing its own set of problems. Comparable sales declined 1.5% through the first half of 2017, on top of a 2.8% decline during the first half of last year. Kohl's adjusted profits were down as well as the company struggles to attract customers to its stores. J.C. Penney's inventory issues are company-specific, but the broader problem of weak customer traffic at department stores is affecting both companies.

Now what

A comparable-sales increase during the third quarter is a positive development, and the company said that it expects comparable sales to rise in September and October even after backing out the effects of the liquidation. But with adjusted profits now set to be minimal, even including asset sales, it looks like J.C. Penney's turnaround has hit a major snag.

J.C. Penney will report its full results on Nov. 10. The company plans to detail how it's aligning its expense structure to better reflect the state of its business at that time. In other words, more cost-cutting could be ahead.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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