Shares of J.C. Penney (JCP) added to the retail wreckage of the last few days after reporting a larger than expected loss for the latest quarter, adding to concerns about the broader sector following disappointing reports yesterday from peers Macy's (M) and Kohl's (KSS). Separately, higher-end peer Nordstrom (JWN) bucked the trend of declining sales in the sector, reporting a comparable store sales gain for its latest quarter and raising guidance. While Nordstrom shares briefly went into the green, they declined following the market open as the sector gives back some of the gains seen in the run-up to this week's reports.
J.C. PENNEY: J.C. Penney reported an adjusted loss per share for the second quarter of (9c), compared to forecasts for a (5c) loss. Comp sales slid 1.3%, falling below the retailer's fiscal year guidance. The comp sales decline for the quarter resulted in a positive two-year stack of 0.9%, the company said. Despite misses on the EPS and comp sales lines, revenue of $2.96B beat forecasts of $2.84B. CEO Marvin Ellison said that while the broader retail sector "remains challenged," all categories delivered improved sales results during the quarter, with beauty, home refresh and omnichannel continuing to deliver positive sales growth. On the company's earnings call, Ellison said there was greater margin and EPS dilution than expected during the quarter following the liquidation of inventory in 127 closing stores, but said he believes this was "isolated" to Q2. Looking ahead, J.C. Penney backed its guidance for fiscal 2017 adjusted EPS of 40c-65c and SSS down 1%-up 1% and said it expects improved results in the back half of the year. Ellison said that July's sales trend has carried into the early back-to-school season.
NORDSTROM: Nordstrom, meanwhile, yesterday reported EPS of 65c, beating analysts' estimates of 64c, and total revenue of $3.79B also beat the $3.75B consensus. Comp sales for the quarter were up 1.7% compared to last year and followed a 0.8% decline last quarter. Nordstrom raised its FY17 adjusted EPS view to $2.85-$3.00 from $2.75-$3.00, revenue growth view to roughly 4% from 3%-4% and backed its SSS growth view of approximately flat. Nordstrom said that its recent Anniversary Sale, historically its largest event of the year, performed better than recent trends.
WHAT'S NOTABLE: Mall-based retailers have been hurt by the increasing popularity of fast-fashion retailers like Zara, Forever 21 and H&M, as well as an increase in online shopping. Nordstrom said in June that members of its founding family formed a group to explore the possibility of pursuing a "going private" transaction, but Women's Wear Daily recently said that the retailer is not in negotiations with "anybody" regarding a potential sale. Talks continue with potential parties to a deal, though they are described as informal, the report noted.
PEERS: Yesterday, sector peer Macy's (M) sunk after reporting another quarter of declining comps, though its EPS and revenue were above analysts' estimates. While Macy's backed its guidance for FY17, it forecast third quarter comp sales on an owned plus licensed basis down 2.5% "or worse" and fall season comp sales on an owned plus licensed basis to be down 0.8% to down 2.6%. Gross margin for the year is expected to be down 50-70bps vs. last year, better than previous guidance. CFO Karen Hoguet said that there was "not a lot new" on Macy's real estate initiatives since June's investor meeting and that work on its Herald Square location "continues." Kohl's also reported earnings yesterday, with EPS and revenue narrowly beating estimates, though its comp sales declined 0.4% from the year ago period. "The traffic momentum that we saw in the combined March/April period accelerated in the second quarter," CEO Kevin Mansell said in a statement. "Though transactions for the quarter were lower than last year, July transactions increased. We are also excited by the sequential sales trend improvement in all our lines." Kohl's said it is "on track" to achieve its financial goals for the year. On its earnings call, Mansell reiterated that Kohl's sees an opportunity to capture sales from competitors' stores that are closing, which may include closing stores from Macy's and J.C. Penney. Another peer, Dillard's (DDS), also reported earnings yesterday, reporting much weaker than expected EPS on sales that missed estimates. CEO William Dillard, commented that "Significant markdowns led to a disappointing loss as we dealt with inventory, which was up 2% at quarter end."
ANALYST COMMENTARY: Credit Suisse analyst Christian Buss said this morning that "continued caution is in order" following J.C. Penney's Q2 report, as he sees core operating profitability declining and underlying demand still being "tepid." UBS analyst Michael Binetti said that while Macy's results were better than expected, guidance for the second half has damaged confidence that positive trends are sustainable. The analyst maintained his Neutral rating on Macy's but cut his price target to $21 from $23. Meanwhile, Kohl's was upgraded to Hold from Reduce at Gordon Haskett and to Neutral from Underperform at Credit Suisse.
PRICE ACTION: In morning trading, J.C. Penney is off earlier lows, but still down 17% to $3.91, while Nordstrom is down 2% to $44 per share.
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