When I went to bed last night, the initial enthusiasm over JC Penney’s (JCP) earnings beat was already starting to dim, and today it’s turned to outright pessimism, as the stock is now down on the day. What happened?
Bloomberg Part of the problem: Analysts aren’t sure JC Penney can keep up the strong performance. Maxim Group’s Rick Snyder, for instance, says “things get more difficult from here” for JC Penney:
The company gave Q3 guidance including a mid-single-digit positive comp, gross margin similar to Q2, and SG&A dollars slightly ahead of last year’s Q3. Comps get more difficult from here with the Q3 compare of (4.8%), which compares to the Q2 comp compare of (11.9%). The online comp becomes much more difficult in Q3 at 24.3%, compared with the Q2 compare of (2.3%). The just reported Q2 online comp of 16.7% was impressive, but we are modeling a flat online comp in Q3. SG&A dollars are expected to increase in Q3 as the company plans to increase advertising and accrue bonuses, which it did not do last year. In addition,
the company expects a decline in Q3 credit income, which becomes a benefit in Q4.
The company guided free cash flow to positive. However, this projection
includes a working capital inflow of between $250 and $300 million. This is likely a one-time inflow and unlikely to be repeated in subsequent years. We have modeled slight working capital outflows beginning in 2015 as we assume inventory grows in line with sales. We have modeled free cash flow increasing only modestly even beyond 2014.
Shares of JC Penney have dropped 3.4% to $9.41 at 12:52 p.m.
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