JCPenney (JCP - commentary - Cramer's Take) stock is down nearly 50% as it grapples with shrinking earnings, as consumers stay home in droves, licking their wounds from the economic slowdown. Back in the good old days of January, analysts were looking for JCPenney to earn 96 cents per share this quarter, now they have adjusted estimates to reality and are expecting earnings of 50 cents per share on $4.16 billion in sales.
Last week, JCPenney previewed May trends, indicating that the month should see a 5% or so decrease in comps, so no recovery is imminent despite stimulus checks landing in mailboxes this month.
JCPenney is known for strong management, and the team is reacting quickly to the difficult environment. The company is aggressively working down inventory and expects inventory comparisons to be negative after back-to-school. Management is rethinking all capex, with an eye toward conserving cash as it slows new store openings and renovations. The company is also leveraging the relationships built with Chinese vendors over the years to keep sourcing costs low and expects only a 2% cost increase while other retailers could see up to 8%.
Since you can't cut your way to prosperity, investors will also focus on growth initiatives. Sephora is strong, now contributing 5% to store sales, and the 72 units will grow as all new JCPenney stores will include a Sephora boutique. The company is also committed to the American Living brand and is pleased with the four deliveries taken so far. Only about 3% of capex is going into American Living, so the returns can be good on relatively low capital commitments.
At the time of publication, Dvorchak had no positions in the stocks mentioned, although positions can change at any time.
Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.
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