Gap (NYSE:GPS) recently cut its full-year earnings guidance due to falling sales and slack demand. Because it's the latest clothing retailer to fall short of analyst expectations, some worry it's a warning sign the turnaround at J.C. Penney (NYSE:JCP) is faltering.
Comparable-store sales at Gap brand stores fell 5% in the third quarter, while they were flat at Banana Republic and up 1% at Old Navy. Third-quarter revenues at the clothing retailer were $3.97 billion, down from the $3.98 billion it generated a year ago. Profits were higher, though, with net income rising to $351 million, or $0.80 per share, compared to $337 million, or $0.72 per share, a year ago. Wall Street had expected profits of $0.79 per share on revenues of $4.04 billion.
Analysts say tight-fisted consumers being careful with their discretionary spending money are to blame. The spending habits are causing retailers to slash prices to attract customers, but that will only pinch profit margins.
J.C. Penney is in the midst of a turnaround that was gaining traction until this past quarter as its sales also came in lower than a year ago. But losses narrowed sharply year over year and where traffic was still negative, the metric continued its sequential improvement.
As a recent investor in J.C. Penney, I'm not worried yet about the pause in its recovery. Gap is the biggest apparel-focused retailer. Whatever slowdown there is in consumer spending, it will feel it more acutely than others.
And while some on Wall Street say consumer spending is falling, Action Economics says it's back on the rise. As reported by USA TODAY, the market analysts there say retail sales rose 0.3% in October, up from September when they experienced a similar percentage rate decline. According to that report, IHS Global Insight agrees, saying the Christmas season could be particularly strong because discretionary spending reversed course dramatically.
Retailers like J.C. Penney also should benefit from the sharp decline in gas prices as it should give people more money to spend. AAA says gasoline prices average $2.81 in the U.S., 14% lower than last year and the best they've been since 2009. The average price of gas has fallen every day for 60 straight days.
That's going to put more money in the pockets of shoppers. Coming as it does before Christmas, it's more likely they'll spend that money instead of save it, however Fortune magazine worries it will go to pay for higher prices at the grocery store.
Still, J.C. Penney's performance was better than its rivals. It is still in a financially difficult place, but destination is better than location.
And J.C. Penney is heading to a better place. In the most recent quarter:
- Clearance merchandise is down 30% from last year.
- Gross margins up 710 basis points to 36.5% of sales.
- Same-store sales were flat.
- Full-year guidance for comps and gross margins was maintained while rivals cut theirs.
- Free cash flow will be positive by year's end.
- Liquidity will be a healthy $2.1 billion.
And Gap has issues unique to itself, including a CEO transition.
Of course, J.C. Penney just announced its own new CEO, but with a mandate to keep the department store chain on a steady course while Gap's CEO is to remake the clothing store digitally, Penney may have an easier time of it.
Having recovered its balance after nearly going under the department store chain is now sailing on calmer seas. There are still risks that could sink its recovery, but investors shouldn't read anything into the tea leaves of Gap's earnings report as a warning sign for J.C. Penney.
Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. He owns shares of J.C. Penney Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.