One of retail's biggest losers was one of last week's biggest winners. Shares of J.C. Penney (NYSE: JCP) soared 33.8% last week, moving sharply higher after posting results that exceeded its earlier guidance. It's a welcome break for investors, as the stock had posted double-digit percentage declines in each of its two previous quarterly outings.
There probably weren't a lot of high-fives going around last week among J.C. Penney shareholders unless they just bought in during the past couple of weeks. The stock is still trading 65% lower so far this year.
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A blowout with an asterisk
J.C. Penney's net sales declined 1.8% to $2.81 billion for its fiscal third quarter, as a 1.7% increase in comps was more than offset by the closure of 139 stores. Investors may initially take heart in the positive same-store sales, but that was mostly the result of aggressive sales to clear out its dated women's apparel inventory. Margins naturally contract when big sales are behind the busy registers, and that trend isn't being helped by an uptick in online and major appliances transactions that typically carry lower markups. J.C. Penney's adjusted deficit widened sharply to $0.33 a share.
We're applauding these problematic financials because just two weeks earlier the meandering department store operator was forecasting a loss per share of $0.40 to $45 for the quarter on $2.71 billion in total net sales. It was part of a broader revision where it slashed its full-year bottom-line forecast, taking that adjusted per-share target from between $0.40 and $0.65 down to a range of $0.02 to $0.08.
J.C. Penney is sticking to its meager profit forecast for the entire fiscal year, implying that the better-than-expected bottom-line results in the third quarter will be reversed in the pivotal holiday-fueled fourth quarter. The market set aside those suggestions, encouraged by the sharp reduction in inventory levels over the past year.
This week kicked off on a less jubilant note, giving back a sliver of last week's gains. The stock moved 7% lower on Monday after Citi analyst Paul Lejuez issued a cautionary note. He points out that the increase in appliance sales poses a credit risk. He's also concerned to see that the number of transactions moved lower despite the heavy promotional activity. Negative long-term trends and the retailer's leveraged balance sheet finds him sticking to his Sell rating and a $1.50 price target.
There's naturally a lot weighing on the current quarter. Comps are trending positive -- rising in September and October after falling in August -- but that's a hollow victory until we start seeing sales move higher without heavy merchandise markdowns. Bulls will argue that the battered stock was more than overdue for the first post-earnings rally of the fiscal year, and that the stock represents a much better buying opportunity than it did when it was much higher when the year began. Be careful. There is still a lot more going wrong than right at J.C. Penney in a climate that isn't being very forgiving for traditional mall anchors.
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