After three consecutive quarters of rising sales, J.C. Penney (NYSE:JCP) came up short in the third quarter. In its third-quarter report Wednesday the department store chain said warmer weather kept people from buying autumn apparel, a refrain we're likely to hear more of as retailers miss estimates.
Macy's (NYSE:M) used that excuse when it reported results earlier in the day, and just like all the stores that blamed the snow-in-winter phenomenon for their poor showing in the fourth quarter a year ago, balmy temperatures will now take the brunt of the blame this time around.
Everyone complains about the weather
J.C. Penney on Wednesday reported net sales of $2.76 billion, down just 0.5% from $2.78 billion in the year-ago period, as comps came in flat. Although the retailer's stock was down nearly 10% by 11:30 a.m. Thursday, the report really wasn't such a shock because Penney previously warned that its September sales were softer than expected as follow-through from the back-to-school season never materialized.
While cold weather failed to show up on schedule, it didn't stop J.C. Penney from narrowing its loss more than analysts expected. The department store chain reported a loss of $188 million, or $0.62 per share; adjusted for one-time events the quarterly loss hit $0.77 per share, below the $0.80-per-share loss Wall Street anticipated.
That was due in large part to having much less clearance merchandise going out the door compared to last year. Sales of discounted clothing was down 30% from the year-ago period. While the higher level of clearance items helped drive volume last year, it did so at much lower margins. The company preserved its gross margin in the third quarter, but without the same traffic present, sales took a hit.
Macy's also cut its profit forecast for the year due to anemic sales. Macy's now expects earnings per diluted share for 2014 to be in the range of $4.25 to $4.35, compared with previous guidance in the range of $4.40 to $4.50.And where Penney's comps were even with last year, its rival reported a 1.4% drop.
For its part, Kohl's (NYSE:KSS) reported a 1.5% shortfall in revenue that came in lower than expected, while per-share profit of $0.70 was 13.5% below last year's results and down from the $0.74 analysts anticipated. At Kohl's comparable-store sales declined by 1.8% in the quarter.
Winter never comes
August was the strongest month in the third quarter for J.C. Penney. While it doesn't want to call it a trend just yet (or jinx it), management said it was happy with how the fourth quarter was beginning, too.
It's worth remembering that J.C. Penney's stock slumped sharply last month after the retailer updated analysts to say the third quarter had not progressed as well as previously thought. Sales petered out in September and weren't much better in October. The stock, which had been riding at the $10 to $11 range prior to the review, tumbled nearly 30% to about $7 a share.
Investors, though, might take comfort in the direction the department store chain is moving. Traffic is still negative, but continues to improve sequentially, helped along particularly by Sephora, the makeup business that looks like it will become an integral part of the overall growth opportunity as J.C. Penney repairs itself.
That theme of repair was also evident as the online channel continues to move forward, though sales growth was just 3.4% for the quarter. Coming as it does on top of a monstrous near-30% leap last year, the almost 33% improvement over the past two years remains a satisfactory achievement in the three-year plan laid out for the division. Still, there remains work to do.
An improving financial position
J.C. Penney's gross margin leaped 710 basis points to 36.6% in the period from 29.5% a year ago, and the retailer expects a 500- to 600-basis-point improvement to margins for the year. Operating cash flow also saw markedly better results, going from a use of cash of $737 million in the third quarter of 2013 to a use of cash of $320 million this year. And where the retailer's earnings before interest, taxes, depreciation, and amortization were negative last year, they're currently positive and expected to remain so. It guided to being free cash flow positive and ending 2014 with $2.1 billion in liquidity.
In short, J.C. Penney is expected to dramatically cut its losses in 2014, but ultimately remains unprofitable and has a ways to go yet before it is restored to full health. With traffic down as it heads into the holidays, the company will need a strategy to lure in more shoppers. But oftentimes direction is more important than location, and J.C. Penney, which is entering the final phase of its turnaround story, continues to move along the path to recovery.