Earnings preview: 3 metrics that could seal JCPenney’s fate in Q2

A week ago, JCPenney Company Inc. (NYSE: JCP) received notice from the New York Stock Exchange for not complying with the minimum stock price requirement. The retail firm will have six months to prove its worth and stay listed, but there is very little optimism surrounding the stock in the market.

It will, however, have a chance to steady the boat, if it offers decent second-quarter results that will at the least position it as a buyout target. The results are expected before the opening bell on Thursday, August 15. Here are three metrics that could altogether decide the fate of the stock.

Sales

A consistent decline in sales is one of the foremost factor that has been driving the stock lower over the past few quarters. For the second quarter, analysts expect continued weakness in the top-line with a further decline of 4.3% to $2.71 billion, driven by increased competition from both online and offline rivals.

During the last reported quarter, net sales fell 5.6% year-over-year to $2.43 billion, as comp sales declined 5.5%, the worst in over twos years.   

Gross Margin

Since 2015, JCPenney’s gross margin has been on a downward trend due to a number of factors. While costs associated with e-commerce orders have been weighing on its profitability, the retailer’s low-margin sales initiatives to beat competition added on to the burden.   

The management said in Q1, gross margins were eroded by its exit from the appliances business. In the current quarter, while inventory optimization could help gross margins, the new 10% tariff on Chinese goods starting September, announced by President Donald Trump, could act as a dampener to forward-looking investors.

For the second quarter, the street anticipates a loss of 31 cents per share, narrower than 38 cents per share a year ago.

Debt

The company had recently adopted debt restructuring measures, with a focus on free cash flow at the end of 2019. In the first quarter, JCP lowered its long-term debt by 7%, so look out for how the company performs here this time.

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Also, during the earnings conference call, keep a close tab any updates that the management is willing to provide on its debt restructuring initiatives.

JCP stock has declined 45% in the year-to-date period to less than one dollar. The stock has an average Hold rating in the market, with a 12-month average price target of $1.05.  

Rival Macy’s (NYSE: M) will report earnings on Wednesday, while Nordstrom (NYSE: JWN) and Kohl’s (NYSE: KSS) will report next week.

Listen to on-demand earnings calls and hear how management responds to analysts’ questions