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JC Penney Results Strong But Can They Sustain

JC Penney Results Strong But Can They Sustain
By: Bill Ashton
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JC Penney Company Inc (JCP) reported results for the second quarter of its 2014 fiscal (2QFY14) after the closing bell today. The company generated revenues of $2.8 billion, which came in line with analysts’ expectation of $2.8 billion. Loss per share for the quarter was $0.75, beating the Street’s estimate of a loss of $0.895.

Comparable sales (comps) for the quarter came in at 6%, lower than the 6.2% in the previous quarter, but ahead of analysts’ expectation of 5.8%.  The giant retailer’s management believes that results depict signs of a turnaround, especially since gross margins improved 6.4% from the year-ago period. A sequential comparison, which is perhaps a better measure of the turnaround, shows gross margins were up 2.9%.

The company’s e-commerce business generated revenues of $249 million, a 16.7% improvement from the comparable period last year. However, online sales had grown 25.7% year-over-year last quarter, representing a decline in growth rates, which Bidness Etc had highlighted earlier.

The company was able to report a positive cash flow from operation for the quarter, of $137 million, after having burned cash for several quarters. Free cash flow for the quarter was $76 million, marking a $1.2 billion improvement from the year-ago period. The positive cash flow came largely as a result of halting payments to suppliers.

Guidance

JC Penney updated its third-quarter and full-year guidance. For the third quarter (3Q), it is now expecting its comparable sales to grow in single digits and gross margins to remain at 2Q levels. For the full year, the company is expecting comps to see a mid-single digit growth. Given that 1Q comps were 6.2%, which fell to 6% in the latest quarter, a mid-single digit growth expectation for full-year comps is in the 5% to 6% range. This indicates weakness in the second half of the year.

Going into the second half of 2014, the company will have a lower capital expenditure compared to the first half. This stems from the company’s focus toward liquidity, and expects its cash and borrowing capacity to reach around $2.1 billion by year-end.

Nonetheless, the question that should intrigue investors is how the company was able to improve gross margins for the quarter, when it competitors faced largely depressed margins. Given that JC Penney and other giant physical retailers have recently been relying on online sales to drive growth, a sequential fall in growth of online sales should concern investors.

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