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What Do J.C. Penney Investors Ideally Want to See Happen in the Fourth Quarter?

By Natalie O'Reilly – Feb 6, 2014 at 2:05PM

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J.C. Penney investors have changed their minds about J.C. Penney's fourth-quarter guidance.

A consistent decline in net sales and net income has been the story of struggling department-store retailer J.C. Penney (JCPN.Q) for the last few years. Under the direction of former CEO Ron Johnson from November 2011 to April 2013, J.C. Penney discontinued all coupons and discounts along with pulling some of its popular and exclusive brands from its sales floors -- all in an effort to rebrand J.C. Penney.

These changes, unfortunately, drove customers -- along with their pocketbooks and J.C. Penney's profitability -- away. J.C. Penney has since been attempting to engineer a turnaround in hopes of regaining its long-lost success, and these efforts have investors hanging on every word the company says.

In late November, J.C. Penney announced its third-quarter earnings results and issued guidance for its fourth quarter, which typically accounts for more than 40% of J.C. Penney's annual sales. To say that the holiday quarter is the most important for J.C. Penney, or any retailer for that matter, would be an understatement. On Jan. 8, J.C. Penney reaffirmed its guidance for the fourth quarter, sending the company's stock falling, which makes one wonder what Wall Street would have liked to have heard from the company.

Sticking with their promise
Despite the fact that J.C. Penney reported disappointing results for the fiscal third quarter, the stock jumped 9% on Nov. 21 -- after investors digested J.C. Penney's fourth-quarter guidance.  Investors could not have been more thrilled after J.C. Penney announced an optimistic outlook for the fourth quarter, stating that the company's comparable-store sales and gross margin would likely see improvements.

In addition, J.C. Penney announced that its selling, general, and administrative expenses are expected to be lower in the fiscal fourth quarter when compared to the fourth quarter fiscal 2012, ultimately suggesting that the company is likely to gain some traction with its margins.

Until recently, J.C. Penney had yet to comment on its performance in December in terms of net sales and comparable-store sales, causing investors to be even more curious. However, on Wednesday, Jan. 8, J.C. Penney reaffirmed its fourth-quarter guidance, stating that sales in the period were "satisfactory." 

In other words, J.C. Penney maintained its guidance from what was announced in late November, implying that its fourth-quarter performance was not better than expected. You would think that investors would be content with this news; after all, J.C. Penney did not lower its guidance in any way. Unfortunately for J.C. Penney, investors reacted unfavorably to the announcement, causing J.C. Penney's stock to dive 10% to $7.37 a share.

Those were the days
So what exactly did Wall Street want out of J.C. Penney? Did it truly want it to go above and beyond what it said it would do no matter how reasonable those results were? In a nutshell the short answer is yes. Investors seem to have looked back at J.C. Penney's recent history over the last five years, took in just how far the company has fallen, and simply realized the situation is dire. To get a feel for what investors might be thinking, consider the fact that J.C. Penney is expected to experience a net loss of $0.76 a share on revenue of $3.9 billion in the fourth quarter ending January.

These figures are far from where they were three years ago, when the company reported earnings per share of $1.13 and revenue of $5.5 billion in the fourth quarter ended January 2011. This difference is quite shocking, and when one considers the sales trends at the department store over the last five years, the recent sell-off doesn't seem so unreasonable.

Company-Sales per gross square foot

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

J.C. Penney

$160

$149

$153

$154

$116

Macy's

$161

$152

$162

$174

$184

Dillard's

$126

$112

$116

$121

$121

Company-Sales per gross square foot

4Q
FY 2008

4Q
FY 2009

4Q
FY 2010

4Q
FY 2011

4Q
FY 2012

J.C. Penney

$51.72

$49.55

$50.91

$48.87

$34.68


Clearly, J.C. Penney has a revenue problem that Wall Street is painfully aware of and that needs to be addressed as soon as possible.

The ideal picture
To get a feel for what investors will need to see in order to feel that a turnaround is taking hold, one need only look to the past. The company had actually been performing at least moderately well as recently as the 2011 fiscal year. The company generated $154 per square foot in sales for the year, with $48.87 of those sales coming in the fourth quarter alone. Given that J.C. Penney entered the fourth quarter of FY 2013 with 111 million square feet of selling space and that it expects to earn $3.9 billion in revenue, J.C. Penney will earn $35.50 per square foot in the fourth quarter.

Based on this information, it is plain to see why Wall Street is no longer impressed. It has had several months to digest the fact that J.C. Penney's competitors have maintained their sales rate per square foot while J.C. Penney has fallen behind. Not only that, but a year into its turnaround and the retailer has made a minuscule improvement over the sales results of last year's fourth quarter.

Foolish takeaway
Even though J.C. Penney recently announced that it will be closing 33 of its stores, 3% of the current total, along with laying off 2,000 employees before May, its average sales figures are unlikely to improve that much for the sole reason that these stores are drastic underperformers and are certainly a drag on the company's sales averages. Wall Street initially cheered the company's fourth quarter guidance late last year, but after having several months to digest the news, investors have realized that turning the company around will not be easy.

Until the troubled department-store chain can bring back customers, it is best for Foolish investors to avoid J.C. Penney's shares. Investors would be wise to keep an eye on J.C. Penney's sales per square foot to see if the company's latest strategies are improving sales volume. 

Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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