On Wednesday, department store giant Macy's (M 0.16%) smashed analysts' estimates, posting strong sales and earnings growth for the first quarter. This surprisingly good news raised investors' hopes for the moribund department store sector.
However, J.C. Penney (JCPN.Q) failed to match that admirable performance. In fact, it barely managed to achieve positive comparable-store sales growth last quarter. Meanwhile, gross margin eroded substantially, and the company posted an ugly loss. While management blamed the weak sales and earnings results on unfavorable weather trends, J.C. Penney's mediocre first-quarter performance casts more doubt on its turnaround progress.
J.C. Penney's quarter by the numbers
J.C. Penney posted a meager 0.2% increase in comparable-store sales during the first quarter, well below Macy's 4.2% comp-sales growth (or even Macy's 1.7% gain excluding the benefit from a shift in the timing of a major sale). Total revenue fell 4.1% year over year, due to the company closing nearly 140 stores in mid-2017.
Meanwhile, adjusted earnings per share swung to a $0.22 loss -- $0.02 worse than the average analyst estimate -- compared to adjusted EPS of $0.01 a year earlier (calculated based on new accounting rules implemented in 2018).
|
Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$2.67 billion |
$2.78 billion |
(4.1%) |
|
Gross margin |
33.7% |
36.1% |
(2.4 ppt) |
|
SG&A expense ratio |
32% |
34.7% |
(2.7 ppt) |
|
Adjusted EPS |
($0.22) |
$0.01 |
N/A |
|
Free cash flow |
($421 million) |
($293 million) |
N/A |
Data source: J.C. Penney Q1 earnings report. SG&A = sales, general, and administrative expense; ppt = percentage points.
The most disappointing aspect of J.C. Penney's first-quarter performance was its severe decline in gross margin. Management had warned investors back in March that gross margin was likely to decrease in Q1 before improving later in the year. However, the 2.4-percentage-point decline recorded last quarter was worse than expected. The company's first-quarter cash burn also accelerated.
To be fair, J.C. Penney's year-over-year earnings and cash flow declines in the first quarter were driven mostly by lower real estate gains. That said, the company did get a $30 million one-time benefit during the quarter related to selling the lease for one of its stores. Without that windfall, it would have posted an even bigger loss.
Bad weather takes a toll
J.C. Penney's 0.2% Q1 comp-sales gain came in near the low end of its full-year guidance for 0% to 2% comp-sales growth. It was also well below management's expectations. Back in early March, CFO Jeffrey Davis indicated on the Q4 earnings call that comp-sales growth was likely to be near the high end of the full-year guidance range in the first quarter.
Sales missed expectations at J.C. Penney last quarter. Image source: J.C. Penney.
J.C. Penney blamed its subpar performance on unseasonably cold weather during the spring selling season, particularly in the first half of April. CEO Marvin Ellison noted that during February, March, and the last two weeks of April, comp-sales growth was much stronger than the full-quarter result.
This excuse does carry some weight, as much of the country experienced more severe winter weather than normal, particularly late in the season. Indeed, it was quite surprising that Macy's didn't see a noticeable negative impact from weather last quarter.
On the other hand, the subpar quarterly result indicates that management's efforts to make J.C. Penney a less weather-sensitive business have had minimal impact thus far.
Accounting changes force a guidance cut
While revenue came in worse than expected last quarter, J.C. Penney reaffirmed its guidance for full-year comp sales to be up 0% to 2%. Management was encouraged by the company's solid sales results outside of the worst period of unseasonable weather.
However, J.C. Penney reduced its full-year EPS guidance range by $0.12. It is now calling for EPS between a loss of $0.07 and a gain of $0.13. It attributed this change to the implementation of new accounting rules, rather than to any fundamental deterioration in its outlook.
The key question for investors is whether J.C. Penney can achieve this revised EPS forecast -- and ideally, a result at the high end of the guidance range. After the company's disappointing first quarter, there isn't much margin for error. J.C. Penney simply can't afford any further mishaps, including bad weather.
