It can take a long time for a company to turn itself around, and no one knows that better than investors in discount retailer J.C. Penney (NYSE:JCP). Coming into its fiscal second-quarter financial report on Friday morning, Penney investors were increasingly impatient about the company's progress, and they wanted to see some signs that growth could accelerate and generate some excitement about the retailer for the future. For its part, Penney did succeed in posting better sales and cutting further into its losses, but there's still work for the company to do in the future. Let's look more closely at how J.C. Penney did last quarter and what's ahead for the discount retailer.
How J.C. Penney got back in fashion
J.C. Penney's fiscal second-quarter numbers were uniformly better than most investors had expected to see. Revenue climbed 2.7% to $2.88 billion, faring better than the $2.86 billion consensus forecast among those following the stock. The retailer still posted a net loss of $138 million, but that was 20% smaller than last year's loss, and losses of $0.45 per share were $0.03 better than investor expectations for its bottom-line results.
A closer look at the results shows areas where Penney is making progress. Comparable-store sales climbed 4.1% for the quarter, and while that was slower than last year's fiscal second quarter, it marked a sequential increase from its fiscal first-quarter results. Penney posted improved gross margins by a full percentage point, and overhead expenses fell by more than three percentage points as Penney's cost-cutting measures started to have a material impact. Rising levels of revenue from Penney's private-label credit card division also helped keep general expenses lower.
J.C. Penney continued to gain traction with its partnership with Sephora, as the company specifically called out its strong performance, which included a double-digit percentage increase in comparable-store sales. Elsewhere in the company, Penney said that its Fine Jewelry, Home, and Men's merchandise divisions were its best performers for the quarter. From a geographical perspective, the retailer saw gains in all of its regions, with the best increases in its Western and Central U.S. stores.
CEO Marvin Ellison celebrated the news, citing "the commitment and diligence of the J.C. Penney team" in driving the retailer's positive results. Ellison admitted that there's a lot of work left to do to reach his goal "to regain our status as world-class retailer," but he was still confident in Penney's future.
Can Penney keep climbing?
Penney also took favorable steps with some of its guidance for the full 2015 fiscal year. The retailer boosted its estimate of overhead cost reductions by $20 million to a total of $120 million. That savings should also fall through to its bottom line, and so Penney made a corresponding increase to its pre-tax operating earnings estimate to $620 million. The retailer repeated its past guidance that comparable-store sales would rise by between 4% and 5% this year, with further improvement in gross margins and break-even free cash flow.
Yet one big reason why investors should be pleased with Penney's results is that they come in an environment in which many of its peers have posted poor results. Retail sales at department stores overall have fallen so far in 2015, which comes as somewhat of a surprise given the generally strong levels of consumer spending more broadly throughout the economy. For some higher-end retailers, the strong dollar has kept foreign luxury shoppers away, but even fellow mid-level retailers have started to see greater business losses to online competitors or simply toward spending less.
J.C. Penney shares initially reacted favorably to the news, immediately climbing by about 8% in pre-market trading before giving up much of those gains within the first hour following the announcement. Penney has given encouraging news before that has led investors to conclude prematurely that the retailer was out of danger, but as long as it can continue to make incremental progress toward regaining its status as a key player in the discount retail industry, J.C. Penney appears to be on track eventually to get back some of its former glory.