J.C. Penney (JCP) said on Monday that its profit in the first fiscal quarter came in higher than expected, providing reassurance to investors worried that its turnaround may be stalling and subtly refuting a media report last week saying weak April sales were hurting its bottom line.
Penney is in the middle of a turnaround that has seen it outperform rivals like Macy’s (M), Kohl’s (KSS), and Sears (SHLD) for several quarters, including the crucial holiday season period. But last week, a New York Post article cited an internal memo outlining cost cuts supposedly put in place to protect Penney’s profit amid softer April sales. Penney’s shares, which had already fallen 25% from a 52-week high in March, tumbled 7% on Friday on the unconfirmed report.
The department store chain addressed the Post article obliquely, burying in a press release about the expansion of its appliance business news that earnings before interest, taxes, depreciation, and amortization (EBITDA), a measure of profit that zeroes in on the health of a business itself and is closely watched by bankers, had “exceeded” its expectations for the first quarter. What’s more, Penney said it remained on track for EBITDA to hit $1 billion this fiscal year.
Hitting the $1 billion mark is a key milestone for Penney as it continues to recover from a failed attempt to reinvent itself in 2012 and 2013 that instead cost it $5 billion in sales and nearly caused Penney to run out of cash. The retailer needs to convince shareholders and creditors that its recovery is coming along. Penney has also promised Wall Street EBITDA would hit $1.2 billion next year, helped by cost controls and, more importantly, continued improvements in comparable sales, which strips out the impact of recently opened or closed stores. (In 2015, Penney’s EBITDA hit $715 million, much better than expected, sending shares way up over the winter.)
Penney had to borrow billions in 2013 at punishing rates to stay solvent. So it has made it a priority to pay down a big chunk of its $4.8 billion long-term debt load this year, reducing it between $400 million and $500 million, as it did in 2015. And that leaves little wiggle room for any sales dips, like the kind that many retailers, including Costco Wholesale and L Brands’ Victoria’s Secret, experienced last month.
J.C. Penney’s stock rose 3% on Monday, suggesting that investors are still skeptical about the turnaround. They’ll know for sure how the first quarter went on Friday, when Penney reports quarterly results.
As for the turnaround, it continues apace: Penney announced on Monday that its return to selling appliances, first reported by Fortune in February, would be expanded to 500 stores from a 22-store pilot. The company is looking to take advantage of Sears’ crumbling sales and win some of that retailer’s business in that area, where it is the leader. The home appliances efforts is aimed at revving up sales per square foot in the stores’ home goods section, a major laggard in Penney stores, and it is the first major new initiative by former Home Depot senior executive Marvin Ellison since he took the reins as chief executive officer last August.
