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J.C. Penney’s Earnings Could Surprise Wall Street Again, Here Is Why

NEW YORK (TheStreet) -- J.C. Penney (JCP - Get Report) could positively surprise Wall Street once again when it announces second-quarter earnings and third-quarter guidance on Aug. 14 after the close.

If it does, CEO Mike Ullman and his team will gain a good bit of support in the investment community.

Department stores reported disappointing earnings during the first quarter thanks to bad weather. According to data compiled by Bloomberg, four of six department stores with a $2 billion market cap or greater met lowered Wall Street earnings expectations -- only Sears (SHLD - Get Report) and Kohl’s (KSS - Get Report) fell shy. On average, first-quarter gross profit margins for the sector declined 40 basis points year over year, as compiled by Bloomberg. Even Macy’s (M - Get Report), long viewed as the industry's best operator, notched a 1.6% same-store sales decline in the quarter, though it reaffirmed its fiscal year earnings per share guidance of $4.40 to $4.50.

Watch More: Starbucks Store Makeovers are Boosting Profit Margins

Then there was J.C. Penney, which my firm Belus Capital Advisors upgraded to hold from sell on April 10. Opposite to its competitors, J.C. Penney had the advantage of cycling steep sales and profit drops a year earlier (which makes current performance look better) as Ullman began to implement merchandising and marketing strategies to reverse the ill effects of ousted CEO Ron Johnson. This time around, helped by a strong Easter selling season in April, healthier stock levels and more effective marketing, J.C. Penney delivered a first quarter that led investors to buy into the notion the business was on a sustainable turnaround path.

J.C. Penney has now surpassed consensus bottom line estimates for two straight quarters. In the first quarter, J.C. Penney beat by $0.11, sending the stock souring 16.25% in the following trading session. When the company beat on the bottom line with its fourth quarter report on Feb. 26, the stock zoomed 25.34% in the next session.

As it pertains to the second quarter, with the liquidity concerns that weighed on the stock in 2013 being removed from the table amid strengthening sales and a new $2.35 billion asset-backed loan, the Street will be zeroed in on the fundamentals. J.C. Penney shares are up 7.1% in the past month alone, suggesting that Ullman’s efforts centered around selling more merchandise at promotional prices instead of clearance, marketing that emphasizes value, and another full quarter of the re-merchandised home department being in operation will reaffirm the bullish comments made the executive on the first quarter earnings call three months ago.

J.C. Penney’s second-quarter guidance calls for a same-store sales increase of a mid-single digit percentage and sequential improvement in gross profit margins versus the first quarter.  Based on Yahoo! Finance estimates, analysts are modeling J.C. Penney’s net sales at $2.78 billion, a 4.5% year over year increase, and a loss per share of 94 cents.

Key Executive Comments: First Quarter Earnings Call

Mike Ullman, CEO

Looking ahead, we anticipate further gross margin expansion in the second quarter. ...

Our conversion rates when they are in the store have been consistently positive for the last two or three months. So we feel that we do have a sustainable trend and we do have a lot of analytics to back it up.

Ed Record, Chief Financial Officer

Store traffic improved sequentially versus the fourth quarter of last year, and was positive during the month of April, as well as during key promotional and holiday periods. April represents the first time in over 30 months our store traffic was positive. ...

Our store conversion average transaction size and units per transaction for the quarter were all up significantly versus last year. In addition, our average unit retail was up low single-digits.

Identifying What’s Happening at J.C. Penney

This self-produced Vine video shows what was likely driving J.C. Penney throughout the second quarter: more merchandise selling at promotional prices and fewer racks labeled with red clearance signs, which could be beneficial for J.C. Penney’s profit margins as it was in the first quarter.

-- By Brian Sozzi, CEO of Belus Capital Advisors, analyst to TheStreet. At the time of this publication, Belus Capital Advisors rated J.C. Penney shares a hold. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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