J. C. Penney (JCP) Slammed; JP Morgan Sees Q1 'Pothole'

J. C. Penney (NYSE: JCP) is down sharply Friday (-9%) amid reports the company is cutting employee hours amid an 'expense challenge'. In addition, a negative note from JPMorgan analyst, Matthew Boss, following field work, is also weighing. Ross said his recent field work supports a potential Q1 'pothole'.

"Following management meeting takeaways at our 3/29 Retail Round-up in NYC (reduced 1Q SSS), our store work the past 4 weeks in 5+ regions points to increasing top- and bottom-line red flags," he said. "While anecdotal field feedback supports this morning’s NY Post quarter-end SG&A cut call (employee hours + overtime pay reduced), which on our math equates to $8M in savings or $0.03 in 1Q potential EPS, we believe top-line and gross margin implications from our observations (pictorial herein) are larger."

"Specifically, our work points to a current build of excess winter and seasonal inventory carried over from 2H15, delayed additional hard markdowns up to 120 days in numerous cases (vs. average historical dept store cadence of 30 days), and store-level expense initiatives that, based on feedback, are hindering service levels and may not be sustainable."

The firm is lowering 1Q SSS to +2.0% (below mgmt’s 3-4% annual guide), modeling gross margin of 36.5% (= 6bps of expansion given delayed marks), and reducing SG&A by ~$8M to account for incremental cuts that offset ~100bps of SSS deterioration.

"Looking ahead, JCP faces an uphill battle, with inventory clearance serving as a likely 2Q gross margin headwind cutting our model to the first quarterly contraction since 3Q13 with tougher 2H SSS compares (2H = 150bps acceleration) raising additional risk to our positive mid-single-digit back-half model," Ross added.

The firm reiterated a Neutral rating and cut its price target $7.00 (from $10.00)

For an analyst ratings summary and ratings history on J. C. Penney click here. For more ratings news on J. C. Penney click here.

Shares of J. C. Penney closed at $8.93 yesterday.

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