JCP is poised to become the comeback kid of retail this year.
The century-old U.S. department store is expected to meet its conservative estimates for third-quarter earnings today and real growth could come in the final quarter of 2016, when the effects of new sales initiatives are expected to kick in.
Economists polled by Bloomberg estimate a net loss of 21 cents per share in the third quarter, down from last quarter, partly thanks to weaker than expected back-to-school sales. Total sales are expected to rise to $2.95 billion, despite a dip last month, which represents a 1.8 percent year-over-year gain. Analysts expect same store sales, a key metric of retail performance, to grow 2.4 percent in the third quarter; below management’s 4 percent forecast, but ahead of competitors such as Macy’s who reported a 3.3 percent drop Thursday.
“There is a credible turnaround story unfolding at J.C. Penney and we believe management’s financial targets are achievable despite secular pressures,” said Mark Altschwager, analyst at Robert W. Baird & Co.
Stocks closed at $8.81 on Thursday, up 5 percent, as investors rallied to buy beaten up retail stocks after Macy’s and Kohl’s reported better than expected earnings and showed optimistic outlooks for the holiday season.
In the past, J.C. Penney’s failure to transition into the digital age and reposition sales to target younger generations has cost the business customers, but new CEO Marvin Ellison is bringing the store back to life by introducing new services and expanding its online presence.
“J.C. Penney is a unique, on-track turnaround story with many levers for management to pull,” said Deutsche Bank in an analyst’s note.
The Sephora beauty brand, now offered in 60 of its stores, has become a key driver of growth, making up more than 10 percent of sales in these locations. It is unique to J.C. Penney and gives customers a reason to visit the store.
“It’s a traffic driver,” said Steve Ruggiero, head of research at R.W. Presspich & Co. “It brings in millennials, who have more disposable income and it creates better sales for other labels. Macys and Kohl’s don’t have this, which is why they have negative same store sales growth,” he said.
In early October, CEO Ellison rolled out appliances in 500 stores to take advantage of Sears’ implosion and re-direct lost foot traffic to J.C. Penney.
These higher priced goods have boosted store credit card use, which have seen more transactions in the last quarter and helped improve loyalty to the brand.
“It’s turbo charging their sales,” said Ruggiero. “They are going to have more visits and very likely to have more transactions from it,” he said.
Ellison’s expansion of private label brands is also helping to improve customer loyalty and differentiate the company’s offering. In the first half of 2016, private brands accounted for 45 percent of total merchandise sales, up from 44 percent from the previous year. Private brands have higher margins and help to preserve profits against rising labor costs and administration expenses.
In the second quarter, digital sales improved after the store launched a new mobile app. This is expected to happen again after the company launched its “buy online pickup in store” service this September. The effects of which are likely to be seen in J.C. Penney’s fourth quarter results.
For now, all eyes are on the end of year results.
“I am very optimistic about them beating my number for the full year, I’m not as optimistic about them beating it for the third quarter,” said Ruggiero.