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J.C. Penney Guts First-Quarter Earnings Forecast

Posted: Apr 01, 2008 11:23 AM by Glenn Curtis

Tickers in this Article: JCP, SHLD, M, JWN

J.C. Penney (NYSE:JCP) shocked the investing community last week when it lowered its first-quarter earnings guidance to 50 cents per share, down from 75-80 cents. This is really bad news, and it does not bode well for the retail stalwart.

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Investors had been eagerly awaiting the effects of J.C. Penney's new lifestyle brand American Living, launched this spring. The brand encompasses men's and women's clothing, footwear and even home furnishings. However, the company's lowered expectations mean that perhaps this new brand is not the cure-all investors had hoped for just yet.

30% is a Big Number
It wasn't that long ago, February 21 to be exact, that the company issued guidance of 75-80 cents a share. Now it's already lowering it by more than 30%! (To learn more about earnings estimates, check out Can Earnings Guidance Accurately Predict The Future?)

It's possible the bar was set too high initially, but frankly, I don't think that's the case. Like many of its mall-based brethren, J.C. Penney has been under huge pressure due to the economy and the competitive landscape. I can't see an experienced management team going out on a limb with a glowingly optimistic earnings expectation. The second, more likely, possibility is that things have deteriorated so rapidly that management never really saw it coming. Full-year predictions may not even be possible at this point.

J.C. Penney may not be alone. Other department stores must be feeling similar pain. If I owned Nordstrom (NYSE:JWN), Sears (Nasdaq:SHLD) or Macy's (NYSE:M) at this point, I'd be worried too.

What Will The Analysts Do?
In conjunction with its updated Q1 guidance, management also said, "sales at stores open at least a year ... are expected to fall at least 10% in March and by a high-single digit percentage decline for the entire quarter." Also, understandably absent from the release was any updated earnings guidance for the full year.

It makes me wonder how bad things could get on the earnings front, and by extension, how much lower the stock could go? The analyst community is no doubt just as shocked as I was by the 30% cut. This doesn't bode well for J.C. Penney. There are unlikely to be many positive reports, and the downgrades may be plentiful. This will create even more pressure on the stock.

Bottom Line
J.C. Penney's dramatic cut in Q1 guidance left me shell shocked, and the analyst community must also be shocked, too. The company's American Living brand was seen by many as part of the solution to J.C. Penney's dwindling profits, but now the company itself is essentially saying, "Don't get your hopes up." I think it makes sense to steer clear of the stock at this point, at least until some earnings visibility returns.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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