Wells Fargo Comments on J. C. Penney (JCP) Q1 Results, Analyst Not Overly Impressed

Wells Fargo maintained a Market Perform rating on J. C. Penney (NYSE: JCP) with a price target of $6-$7. Analyst Paul Lejuez was not overly impressed with Q1, as improvement in comp benefited from Home, which was previously under construction.

"JCP’s +6.2% comp exceeded consensus of +3.8%, but digging into the drivers of the comp, results seem much less impressive, in our view. Half of the comp came from the home category, benefiting from home departments being closed in 1Q13. GM was fairly weak (though up yr/yr, the improvement was mostly a mix shift toward more private label merchandise, not more profitable sales on like product). Gross profit dollars of $926MM actually fell $30MM short of our ests, and were +14% in Q1 vs. +16% in F4Q 2013. Traffic was still negative in the qtr (though up in April as a result of the Easter shift). Our FY2014E/FY2015E goes from -$3.17/-$2.40 to -$2.86/-$2.26," said Lejuez.

"Loss per share of $1.11 (vs. our est of a loss of $1.15, cons loss of $1.25). EBIT margin +770bps driven by GM +230bps, SG&A leverage of 490bps. Mgmt guided F2Q comps +msd comps, sequential GM improvement (implying a yr/yr increase of at least 350bps), and SG&A expenses slightly below LY. For FY2014 mgmt reiterated +msd comps, and significant GM improvement to LY. They also expect breakeven FCF, which implies $250MM of OCF given capex of $250MM (seems like a stretch unless they plan big inventory declines)."

"Roughly half of the +6.2% comp came from increases in home. Recall that in F1Q 2013, home depts (which account for 20% of store sq ft), were under construction in ~500 stores, meaning that some 10MM sq ft of selling space (~10% of total company space) was almost completely unproductive. In F2Q13, home was a 300bp drag on comps, which is now a tailwind. We expect less benefit in F2Q, as home was a 240bps drag on comps," he added.

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 $8.37 yesterday.

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