Thursday, November 11, 2010

J. C. Penney Co. (NYSE: JCP): Q3 Earnings Preview 2010

J. C. Penney Co. (NYSE: JCP) is scheduled to report third quarter earnings before the opening bell on Friday, November 12, 2010. Analysts on average expect the company to report earnings of 17 cents per share on revenue of $4.25 billion. In the year ago period, the company reported earnings of 11 cents per share on revenue of $4.18 billion. 

J. C. Penney Company, Inc. operates a network of department stores in the United States, Alaska, and Puerto Rico. It primarily offers family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings. The company operates over 1,100 department stores throughout the United States and Puerto Rico. 

In the preceding second quarter, the Plano, Texas based company's net income was $14 million or 6 cents a share, compared to a loss of $1 million or break even per share in the prior-year quarter. On an adjusted basis, the company earned 20 cents per share in the latest quarter. Revenue slipped 0.1% to $3.94 billion. Analysts, on average, expected the company to report earnings of 5 cents per share on revenue of $4.02 billion. 

Early in November, the company reported third quarter comparable store sales increase of 1.9%, compared to decline of 4.6% last year. Total Company Sales were $4.19 billion, up from $4.18 billion a year ago. Last month, the company said that it continues to expect third quarter earnings to be in the range of $0.16 to $0.20 per share.

The company has managed to improve its performance through rigorous cost controls, inventory management and a strategic marketing plan. It is also benefiting from a recovery in consumer demand and economic stabilization.  However, the company is stilll facing a highly competitive promotional environment and ongoing volatility with regard to consumer discretionary spending.

By the end of fiscal 2014, the company expects total sales to increase over $5 billion to reach approximately $23 billion. This is expected to be driven primarily by comparable store sales growth. Gross margin is expected to increase to approximately 40 percent of sales, but total operating expenses should decline as a percent of sales, and operating income is expected to steadily increase over the period and be approximately 9 to 10 percent by 2014. After 2010, EPS growth, adjusted for the pension expense impact, is expected to achieve a 25 percent compounded annual growth rate over the following four year period to bring expected EPS for 2014 to over $5.00 per share.  The company’s cash flow is expected to increase from approximately $200 million in 2010 to $500 million in 2014. 

In October, Vornado Realty Trust (NYSE: VNO) filed a Schedule 13D with the Securities and Exchange Commission disclosing that through its subsidiaries it has acquired beneficial ownership of approximately 9.9% of the common stock of J.C. Penney Company, Inc. Also, William Ackman’s Pershing Square Capital Management LP disclosed a 16.5 percent stake in J.C. Penney. Meanwhile, J.C. Penney Co., Inc. adopted a a one-year poison pill to thwart any takeover attempt. 

Investors are expected to keenly follow the management's commentary about store traffic and the upcoming holiday season. The Friday after the Thanksgiving holiday marks the start of the crucial holiday shopping period.

In terms of stock performance, J. C. Penney shares have gained nearly 20% since the beginning of the year. 

Full Disclosure: None.
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