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Fly Intel: What to watch in J.C. Penney earnings report.

J.C. Penney (JCP) is scheduled to report results of its fourth fiscal quarter before the market open on Thursday, February 28, with a conference call scheduled for 8:30 am EDT. What to watch for: 1. TURNAROUND EFFORTS: Analysts and investors will listen for comments from the retailer on its cost cutting moves. Last year, J.C. Penney reduced payroll, froze overtime and took other major cost cutting steps as it faced "an expense challenge." J.C. Penney management has said the company would continue to be "aggressive" on cost cutting. In August, J.C. Penney said it plans to cut $250M in inventory by 2019. 2. STRATEGY SHIFT: J.C. Penney announced in early February that it will stop selling major appliances in order to improve financial performance and drive profitable growth. Additionally, the struggling retailer said it will mostly stop selling furniture, and that furniture will now only be available online and in select Puerto Rico stores. Instead, the company plans to prioritize and focus on its "legacy strengths" in apparel and "soft" home furnishings, which it said represents higher margin opportunities. Former CEO Marvin Ellison, who left the company last May to become CEO of Lowe's (LOW), made the move into appliances in 2016, but the company faced challenges from expanded offerings from Lowe's and Home Depot (HD). Under Ellison, J.C. Penney moved appliances into about 600 stores. 3. COMPETITIVE LANDSCAPE: Mall-based retailers, including J.C. Penney, have been hurt by the increasing popularity of fast-fashion retailers like Zara, Forever 21 and H&M. The current promotional environment as well as tourism sales and a shift to e-commerce has been a focus for many retailers as of late. In October, Sears (SHLD) filed for bankruptcy. At the time, the company said it intends to stay in business, keeping open stores that are profitable. Credit Suisse analyst Michael Binetti says J.C. Penney is best positioned to gain share in 2019 due to close proximity. Binetti does not see this as sustainable customer acquisition for J.C. Penney given the increased risk of closing destabilized malls, limited visibility to an improved merchandise strategy, and leverage constraints to growth investing. Overall, the analyst believes that while there may be some near-term share benefit, a Sears liquidation could be a bigger tipping point that will accelerate closures of already weakening U.S. C&D malls. 4. OUTLOOK: J.C. Penney has struggled more than some of its peers, including Nordstrom (JWN) and Macy's (M), and in November, withdrew its earnings guidance for FY18 given the recent appointment of a new CEO and interim CFO. Prior to the withdrawal, the company had again cut its FY18 outlook as it continued to deal with too much inventory. New CEO Jill Soltau, the former president and CEO of Joann Stores, said on J.C. Penney's Q3 earnings conference call in November that restoring the company to profitable growth will be a "lengthy" process. In January, J.C. Penney said its comparable store sales for the nine-week period ending January 5 fell 3.5% on a shifted basis, with sales falling 5.4% on an "unshifted" basis. The retailer said it still expects to "generate positive free cash flow in FY18, reduce inventory in excess of $225M, or 8%, and expects to end the year with liquidity in excess of $2B."

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Publication:The Fly
Date:Feb 27, 2019
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