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Retail Weakness Not Gone Yet; Is J.C. Penney a $0?

publication date: Mar 5, 2018
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author/source: Kris Rosemann

Let’s talk J.C. Penney, Foot Locker, American Outdoor Brands, and Vista Outdoor.

By Kris Rosemann

We've been watcing the retail landscape closely as it relates to the health of the consumer.

Department store operator JC Penney (JCP) bucked the positive trend of department stores rallying following their respective earnings releases with its fiscal fourth quarter report before the open March 2. Shares sold off aggressively following the announcement of results, despite comparable sales climbing 2.6% from the year ago period. Gross margin improved 50 basis points thanks largely to lower promotional activity, a positive development across department stores this quarter as consumer spending remains robust (US consumer sentiment jumped to 99.7 in the month of February from 95.7 in January, led by the current conditions component, which indicates positive consumer spending). Gross margin improvement and cost discipline helped the firm raise its adjusted earnings per share to $0.57 in the quarter from $0.22 in the prior year period.

JC Penney’s fiscal 2018 guidance for comparable sales to be flat to up 2%, despite likely being an improvement over 0.1% growth in fiscal 2017, may be the core driver behind its material share price decline following the release of its earnings report. The company previously issued guidance of a 3% CAGR for comparable sales from fiscal 2017-2019, and with fiscal 2017 coming in significantly below that target and another year of underperformance relative to that target expected in fiscal 2018, investors may be losing confidence in management’s turnaround plan. This may be an appropriate time to remind readers that the lower end of our fair value range for JC Penney’s shares is $0.

Shoe retailer Foot Locker (FL) continued its recent struggles in its fourth quarter of fiscal 2017, results released before the open March 2, as comparable-store sales fell 3.7% from the year-ago period. Unlike the department stores, Foot Locker was unable to distance itself from the overly promotional environment, which helped contract its gross margin to 31.4% in the quarter compared to 33.7% a year earlier. Non-GAAP earnings per share fell to $1.26 from $1.37 in the fourth quarter of fiscal 2016.

Foot Locker expects early fiscal 2018 to bring many of the same challenges as fiscal 2017, but a return to positive comparable–store sales growth is expected by mid-2018 as it targets full year comparable store sales to be flat to up at a low-single-digit rate. Gross margins are projected to begin recovering in the year, and management expects a double-digit growth rate in annual earnings per share. However, the expectations for weakness to persist at least in the near term continues to weigh on shares, which fell precipitously following the release of the report. Foot Locker’s turnaround may be more difficult than management lets on.

Though we prefer to refrain from making political statements or commentary on the politically-charged topic of gun control, its impact on related retailers should be noted. In our opinion, the confluence of a challenging demand environment--American Outdoor Brands (AOBC) expects lower firearm demand to continue for “some time” and its firearm revenue to be flattish over the next 12-18 months--and tremendous political scrutiny make the space largely "uninvestable" for the time being. Potential regulatory action could push this point further, and Vista Outdoor (VSTO), which generates more than half of its revenue from ‘Shooting Sports,’ has noted in its most recent 10-K that it “could find it difficult, expensive or even practically impossible to comply with” legislation regulating firearms and ammunition.

Markets continue to be highly volatile of late.

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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.


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