Shares of J.C. Penney (JCP) plunged in pre-market trading after the retailer slashed its forecast for fiscal 2017 as it accelerated actions to liquidate inventory and overhauled its women’s apparel department. Following the implementation of the “reset,” the retailer said it has already seen an improvement in performance. THIRD QUARTER UPDATE: J.C. Penney said it expected to report an adjusted loss per share of (45c)-(40c) for the current quarter, well below the current analysts’ consensus of a loss of (18c), and comparable store sales up 0.6%-0.8%. Cost of goods sold for the quarter are expected to increase 300 to 320 basis points compared to the same period last year, impacted primarily by a greater sales penetration in major appliances and e-commerce and the decision to accelerate the liquidation of inventory. Chairman and Chief Executive Officer Marvin Ellison stated that “based on the encouraging results from a third quarter reset in women’s apparel, which expanded our casual and contemporary offering, we made the strategic decision to accelerate a wider transformation of the entire women’s department by clearing slow-moving inventory primarily in women’s and other apparel categories.” He noted that “following this comprehensive reset, we saw an improvement in performance, particularly in our women’s division.” The retailer also said that Jeffrey Davis, its new Chief Financial Officer, will oversee the company’s pricing and planning policies to improve its predictive analytics capabilities and get a better view of current sales trends. The retailer said the inventory liquidation favorably impacted sales during September and October, and that “although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the company as we transition into the fourth quarter and fiscal 2018.” J.C. Penney will report third quarter results on November 10. SLASHED FISCAL 2017 OUTLOOK: However, the “improvement” Ellison noted following the reset was not enough for the retailer to maintain its forecast, and J.C. Penney significantly cut its fiscal 2017 adjusted EPS view to 2c-8c from 40c-65c and comp sales down 1% to flat vs. its prior view of down 1% to up 1%. Prior to the report, analysts expected J.C. Penney would report FY17 EPS of 43c. Cost of goods sold for the year are now seen up 100-200 basis points vs. 2016 and free cash flow is now seen at $200M-$300M. WHAT’S NOTABLE: Retailers tend to clear out leftover inventory ahead of the critical holiday season to stock up on fresh merchandise. J.C. Penney and other mall-based retailers and department stores have been hurt by the increasing popularity of fast-fashion retailers like Zara, Forever 21, and H&M, as well as an increase in online shopping on sites such as Amazon (AMZN). PRICE ACTION: J.C. Penney is down 25% in pre-market trading. OTHERS TO WATCH: Peers trading lower ahead of the market open include Macy’s (M) and Kohl’s (KSS).
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